Health insurance rates: California plans to crack down, but how hard?

As millions of Californians continue to cope with surging costs for health insurance, state lawmakers, consumer advocates and lobbyists in Sacramento are haggling over how tough to get with companies seeking large rate increases.

August will be a key month as state officials try to forge a strategy to comply with the nation’s new healthcare law. Among the law’s far-flung provisions is a call for states to develop plans for reviewing “unreasonable� increases in health insurance premiums.

Insurance analysts say they expect Gov. Arnold Schwarzenegger and state lawmakers to move quickly — the Legislature is scheduled to adjourn Aug. 31, and all pending legislation that doesn’t pass by then will die.

“It’s certainly going to be quite an active month in terms of getting a bill passed,� said Shana Alex Lavarreda, director of health insurance studies at the UCLA Center for Health Policy Research. “This moment in time, when there is such a strong focus on rate regulation, is the best opportunity to make this happen.�

The Legislature is already grappling with three measures that would crack down on insurance companies.

One of them would prohibit health insurers from raising rates without regulators’ approval, a requirement that already applies to automobile and property insurers. Another would require insurers to justify decisions to deny coverage or charge higher-than-standard rates. The third would instate a temporary moratorium on rate hikes and then require insurers to seek permission before significantly boosting premiums.

Schwarzenegger calls such rate regulation a “blunt instrument� that would do little to address the underlying growth of medical costs.

Instead, the governor’s office has introduced a separate plan that would require insurers to hire independent actuaries to review their filings, and to post their proposed increases on the Internet.

Schwarzenegger argues that such scrutiny and public pressure will keep insurers in line. His administration points to the recent example of insurance giant Anthem Blue Cross, which withdrew a rate hike of up to 39% for individual policyholders in April after an outside actuary found errors in its filing.

“Our belief is that better consumer information and greater transparency in healthcare will … make sure that costs are kept in check,� said Jennifer Kent, who handles health legislation for the governor.

Schwarzenegger has asked the U.S. Department of Health and Human Services for $1 million to pay for his rate review plan. But the governor and the Legislature must still agree on a final blueprint by the end of August, the deadline for legislation to clear the state Assembly and Senate.

As that time nears, Schwarzenegger’s proposal is facing criticism from a broad range of groups.

Insurance industry leaders say the requirement to hire actuaries would drive up expenses and, ultimately, insurance premiums. “This could get pretty costly pretty quickly,� said Charles Bacchi, a lobbyist for HMOs and executive vice president of the Cal Assn. of Health Plans.

Consumer groups, meanwhile, say that allowing insurance companies to pick the actuaries who review their filings would give them too much influence over the process.

“Insurance companies in California will be getting millions of new customers, and the least that Californians should get in return is strong oversight of rates and premiums,� said Judy Dugan, research director for Consumer Watchdog in Santa Monica. “Instead, the governor’s proposal would prevent effective oversight.�

California regulators have long lacked the legal authority to crack down on health insurance rates.

The California Department of Managed Health Care, which oversees HMOs, has no actuaries on staff because the agency has little authority to even evaluate rates.

The state Department of Insurance can stop increases only if it determines that an insurer spends less than 70 cents on medical care out of every dollar it receives in premiums.

“Beyond that, the department has very little authority to reject rate hikes,� said spokesman Darrel Ng.

Under a provision of the new federal healthcare law that takes effect in September, insurers will have to devote at least 80% of their premiums to medical care. Schwarzenegger says the requirement will dramatically curb the insurance industry’s ability to raise rates.

Still, advocates of strict rate regulation believe that California needs additional protections. They say the only sure way is to force insurers to ask permission before raising premiums.

“This is the missing piece of national healthcare reform,� said Assemblyman Dave Jones (D-Sacramento), a candidate for state Insurance Commissioner and author of one of the regulation bills now under consideration. “We need to give the state the authority to reject excessive rate hikes.�

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