New Legislation to Require State Approval of Health Care Premiums in Calif.

4/8/2003

From: Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights, 415-305-5890

SACRAMENTO, Calif. -- Today, Senator Figueroa, Senate President Burton, Assembly Member Laird and the Foundation for Taxpayer and Consumer Rights (FTCR) introduced a new bill that requires health insurers to get state approval before raising premiums.

"HMOs should not be allowed to reap record profits because there is no state oversight of record premiums," said Jerry Flanagan, a consumer advocate for the Foundation for Taxpayer and Consumer Rights. The new bill, SB 26, is sponsored by FTCR and AARP.

HMOs and health plans claim that skyrocketing premiums are the result of increasing medical costs. However, in 2002, the Kaiser Family foundation found that the cost of health insurance for a family of four increased 250 percent more than the rate of medical inflation. According to a report by the Standard & Poor's managed care analyst, Phillip Seligman, HMOs and health plans should continue to reap record profits fueled by premium price hikes. Premiums are expected to continue to outpace medical-cost inflation in 2003.

"Excessive and unfair health care premiums combined with a slowing economy mean more California consumers and businesses cannot afford basic coverage," said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights. "Health insurers should be required to get prior approval for rate increases similar to systems in place for the auto and home insurance."

Similar standards exist in California for home and auto insurance and in 26 other states for health insurance rates. Skyrocketing health care premiums have resulted in a record number of uninsured Californians, 80 percent of whom are working, and an unprecedented increase in middle class uninsured rates.

"SB 26 is a modest step to make sure that HMO profits will never again come before the health care needs of our children, our friends, and our neighbors," said Senator Liz Figueroa (D-Fremont), author of the bill.

At the press conference, Jon Pastoria, a self-employed corporate recruiter from Studio City California, described his struggle to provide basic health care for his wife and two sons and his decision to switch from a comprehensive plan to one that covers only catastrophic illness or injury. Last year, Jon's insurer, Blue Cross, raised his monthly premiums 3 times -- for a 25 percent total increase. Jon then switched his family's coverage to Nationwide, which raised his premium another 25 percent after just two months.

"The government needs to provide oversight. It should limit the number and percentage of increases. Access to affordable health insurance affects everyone, from the poor to the middle class. The situation is only going to get worse," said Jon Pastoria.

At present, consumers and small employers are being forced to choose between paying higher premiums, co-pays and deductibles or to go without care. California small businesses of 50 or less employees experienced an approximated 20 percent increases in 2002, a 19.99 percent premium increase for 2001, and 17.12 percent in 2000. Small businesses comprise nearly 98 percent (or 2.5 million) of all businesses in the state, employing more than 50 percent, or 7.5 million, of California's workforce and generate more than half of the state's gross domestic product. Some HMO and health insurance premiums in California are increasing 20-30 percent and more annually.

"It is imperative that the cost of private health insurance premiums be brought under control. Without regulatory oversight, California employers will drop coverage altogether or purchase plans that employees cannot afford. Either way, the ranks of the uninsured will grow, and the State will pick up the tab," state Assembly John Laird (D-Santa Cruz).

A recent report released by the Kaiser Family Foundation and the Health Research and Educational Trust (HRET) found employee share of health care costs, in the form of co-pays and deductibles, has increased 27 percent for single coverage and 16 percent for family coverage. In addition to small employers and their employees, among the hardest hit by soaring premiums are the approximately 1.5 million self-employed Californians and millions of pre-Medicare retirees without a health care retirement benefit.

"As the economy slows employers will require workers to pay more money for fewer benefits," said Flanagan. "Small businesses are the life-blood of California's economic recovery. Health care costs now make up their single largest employee benefit expense. The legislature and Governor Davis must act to protect them and the state from unconscionable profiteering by health plans," said Jerry Flanagan.

Meanwhile, inefficient HMOs and health insurers spend 12-33 cents out of every premium dollar they collect on administration, salaries, and advertising and are recording record profits. PacifiCare reported a $37 million dollar profit in the fourth quarter of 2002. The profits of WellPoint, the parent company of Blue Cross, jumped 64 percent in the fourth quarter of 2002 over the previous year. Recent data from the Department of Managed Health Care (DMHC) shows that 5 state HMOs have $2.2 billion in excess cash reserves.

"The only thing that the free market has done for health care is given health insurers the freedom to raise rates beyond the reach of average consumers," said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights.

SB 26 requires that before an HMO or health insurer can increase premiums, co-pays or deductibles, approval must first be obtained from the Department of Managed Health Care or the Department of Insurance. Proposed rate increases may be denied if they are deemed excessive or unfair. The standards used for such approval are similar to those used for auto and home insurance for over a decade in California. The landmark auto insurance reform initiative, Proposition 103, championed by FTCR's Harvey Rosenfield in 1988 established a 'prior approval' system for auto, home, and property/casualty insurance. During the decade after Proposition was adopted, auto insurance rates in California went down by 4.0 percent while insurance products remain broadly available and competitive, and the uninsured motorist population declined by 38 percent. Nationally, rates rose over 25 percent during this period. California consumers saved over $23 billion since 1988 under the prior approval system.

"California has enjoyed a 15 year success story with 'prior approval' for auto insurance. That system protects consumers with a simple mandate: "No rate shall be approved or remain in effect which is excessive, inadequate, or unfairly discriminatory." It is long overdue for this standard be applied to health insurance," stated Flanagan

In addition, SB 26:

-- Requires health plans to provide detailed financial institution to the regulator with each premium increase request. -- Establishes a clear legislative directive that no rate, co-payment or deductible shall be approved or remain in effect which is deemed to be "unfair or excessive." -- Allows consumers and consumer groups to intervene in rate review proceedings to ensure that the legislative intent is implemented.

There are over 6.2 million uninsured in the state of California who represent over 20 percent of the state's population under the age of 65. The numbers and percentages of uninsured Californians have been steadily growing for the past 25 years and are projected to continue to grow for the next decade without state action to control costs.

------ The Foundation for Taxpayer and Consumer Rights is a national non-profit and non-partisan consumer advocacy organization. For more information, please visit us on the web at http://www.consumerwatchdog.org. For more information on our recent work to provide a universal, efficient and quality health care system please visit us at http://www.calhealthconsensus.