California AB52 – Is This A Good Bill Or A Bad Bill?

If and when California AB52 is finally put into law, it is critical that this new empowerment of regulators includes appropriate actuarial review of what is going on, not just the arbitrary judgment of regulators and public opinion polls.|

David Axene

May 18, 2011

In the State of California, current law requires carriers and health care service contractors to notify when rate changes are about to happen. In the case of health insurance regulated by the Department of Insurance (i.e., DOI), there is a prohibition of any rate that results in a life-time loss ratio below 70%. New Federal law prohibits annual loss ratios below 80%. However, there is no current authority given to regulators to approve or reject rates. AB52 changes that by granting regulators the authority to reject and rate or rate change that is found to be excessive, inadequate, or unfairly discriminatory. The bill also requires specific information to be submitted for review by regulators. The bill would authorize the imposition of fees on health care service plans and health insurers for purposes of implementation, for deposit into newly created funds, subject to appropriation. The bill would impose civil penalties on a health care service plan or health insurer, and subject a health care service plan to discipline, for a violation of these provisions, as specified. The bill would establish proceedings for the review of any action taken under those provisions related to rate applications. AB52 clearly authorizes regulators to be more aggressive in their review of rates and rate increases. Current regulation seems to unnecessarily restrict what regulators can do. To the extent that health plans and carriers propose rates and rate increases that are unreasonable, this provides valuable enabling regulation. On the other hand if rates and rate increases are reasonable, AB52 provides a more aggressive and more visible forum for argument and discussion. The rate development process is complex and one that is not readily or thoroughly understood by the non-actuary. Although actuarial calculations are objective, many of the calculations are based upon actuarial assumptions which can be subjective. One person’s objective and reasonable assumption might be determined as unreasonable by someone else. Specifically the setting of underlying health care inflation, a key determinant of rate increases, is subject to major controversy. If the regulators inappropriately charge the carrier as being unreasonable in setting of their assumptions, AB52 introduces a new empowerment that could prove to be more damaging than helpful. Public opinion polls opposing large rate increases have nothing to do with the reality that large rate increases may be appropriate. No one will argue that they are higher than what might be wanted or hoped for. If the appropriately applied actuarial science shows that the rate levels and rate increases are reasonable, then the regulators need to accept the outcome. The underlying characteristics of the health care system may be to blame, not the carriers. If and when AB52 is finally put into law, it is critical that this new empowerment of regulators includes appropriate actuarial review of what is going on, not just the arbitrary judgment of regulators and public opinion polls.

David Axene

David Axene started Axene Health Partners in 2003 after a successful career at Ernst & Young and Milliman & Robertson. He is an internationally recognized health consultant and is recognized as a strategist and thought leader in the insurance industry.