The Insurance Rate Public Justification & Accountability Act - Does It Get To The Real Problem?
A recent press release states, "The California Secretary of State announced today that a ballot initiative to require health insurance companies to publicly justify and get approval for rate increases before they take effect has qualified for the 2014 ballot." The release goes on to state, "the initiative would require health insurance companies to refund consumers for excessive rates charged as of November 7, 2012 even though voters will not vote on the initiative until a later ballot."
The President of Consumer Watchdog stated, "Californians can no longer afford the outrageous double-digit rate hikes health insurance companies have imposed year after year, and often multiple times a year. This initiative gives voters the chance to take control of health insurance prices at the ballot by forcing health insurance companies to publicly open their books and justify rates, under penalty of perjury. Health insurance companies are on notice that any rate that is excessive as of November 7th 2012 will be subject to refunds when voters pass this ballot measure." This effort was supported by State Senator Dianne Feinstein and California Insurance Commissioner David Jones.
Is there more to the story? Is there something else we should be considering? Is it really this obvious that this is solving a major concern or problem?
As with most sensational statements, there is far more to consider as it relates to the affordability of health insurance. As a professional actuary for more than 41 years, I am afraid there is far more to this story than has been described by the proponents of this initiative. The remainder of this article will address some of the most obvious issues.
Do Carriers Intentionally Price Gouge Their Customers?
Although there always seems to be exceptions to the norm, carriers set rates based upon their historical costs and a reasonable projection of what might happen in the future. These rates are developed by professional actuaries who are subject to Guidelines for Professional Conduct that govern their analysis and review methodologies.
Rates are not made subjectively, but rather based upon extensive analysis of what costs have been. Actuaries spend endless hours reviewing the claims experience, analyzing utilization and cost levels, developing estimates of inflationary trends, analyzing operating costs and carefully projecting what future rates will need to be in order to cover costs and produce needed margins. When prior rates are inadequate, premium rates are increased on particular plans to avoid losses.
This process is very systematic and based upon detailed actuarial analyses. This process is not arbitrary or capricious, but can be challenging for some product lines. I know of no competent carrier that intentionally tries to gouge its customers, but rather the opposite. Carriers work hard to find ways to provide the greatest value to their customers and keep rates as low as possible.
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