Prop 45: An internecine fight on the regulatory left
Ominously, Proposition 45, the “Insurance Rate Public Justification and Accountability Act,” is heading for California’s November ballot. If voters approve the Consumer Watchdog-sponsored initiative, health insurers would be bound to submit their rates to the California Department of Insurance for “prior approval.” Such a system already exists in the property and casualty market as a result of the infamous and lamentable Proposition 103.
Currently, health insurers in California are subject to a “file-and-use” system, under which they file proposed rate changes with one of two regulators (the CDI or the Department of Managed Health Care) 60 days before they plan to put them into effect. These regulators review the proposed rates to determine whether or not they are excessive, after an independent actuary has evaluated the rate information submitted to determine whether it is reasonable and sound.
Consumer Watchdog growls that nearly 1 million Californians have been subject to rates deemed “unreasonable” by a regulator. This is not a particularly compelling argument, since what’s reasonable to an insurer trying to cover claims may not be reasonable to a regulator not unwisely considering what’s in the regulator’s political interest. The regulatory review process at best represents a second opinion about reasonability. Operationally, though regulators cannot currently prevent the use of rates deemed unreasonable, the CDI is not shy about exerting pressure on insurers. Bad publicity and a sour regulatory relationship are a high price to pay for a momentary rating victory.
The value of a file-and-use system is that insurers are able to respond to market conditions in a timely manner. The significance of such flexibility is thrown into relief by even a cursory inspection of Prop 103’s prior approval process. There is little question that Prop 103 has had a stultifying impact on market flexibility and innovation. Remarkably, non-traditional allies of the free market have come to that very conclusion.
For example, at a July 2 hearing, a joint legislative committee listened to testimony from advocates and opponents of the measure. Covered California, the organ responsible for administering the state’s healthcare exchange, expressed strong concerns about the impact of introducing another layer of rate review. Their representative opined that insurers would be unlikely to present their best and final rates to Covered California were they aware that they would be compelled to take further rate-reductions when subsequently presenting to the CDI.
Covered California does not go far enough. Like Prop 103, Prop 45 includes a provision by which private intervenors may challenge rate changes of 7 percent or more. The involvement of an intervenor dramatically increases the amount of time necessary for a rate to gain approval and is a serious obstacle to sound business judgment. The good news, for intervenors, is that they can get rich through their efforts.
The greatest failure of Prop 103 is that merely changing insurers’ pricing behavior does not address the foundational drivers of insurance costs. Thus, while realizing no meaningful benefit, Prop 45 could force market stagnation and, in the worst case, force some carriers out of the exchange due to rate inadequacy. Given that only 13 providers participate on the Covered California exchange, of which only four providers service the majority of the market, any departure from the exchange would be a significant competitive loss to the state-run system.
It is ironic that market concerns are being trumpeted by a state agency fearing that its bailiwick may shrink by the interference of a left-leaning “public interest” group. Ironic, but not funny.
