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.
Why Do Premium Rates Go Up So Much?
There are many reasons why rates increase but the most prevalent reason is the high cost of health care. Most of the premium goes to pay health care bills. Under health care reform at least 80% - 85% of the premium goes to pay for health claims. The carrier has little control over these costs other than their efforts related to negotiating discounts and in the impact of their care management activities. The carrier is subject to the prices charged by health care providers. Hospitals charge what they want to charge and carriers try to keep these down by negotiating and maintaining discounts from billed charges.
Since the government sponsored programs pay deeply discounted prices for Medicaid and Medicare members, sometimes below actual cost of care, the carriers are subject to a significant cost shift, paying prices much higher than their governmental counterparts. When providers increase their prices, carrier costs automatically increase. Other than the limited impact of regulation on prices for Medicaid and Medicaid patients, there is no oversight of what providers charge for their services. The fear by providers of the pending impact of health care reform and how it will expand the Medicaid population has resulted in some dramatic increases in provider charge levels to carriers.
In addition to the increases in provider costs, premium rates increase for other factors which include:
- Aging: as members age, their costs increase as much as 1.5% - 2.0% per year
- Selection bias at time of lapse: there is a strong tendency for a bias in lapsed or terminated members. The healthier members tend to lapse more quickly than others since they are more easily able to find alternate coverage. This tends to increase average costs about 1% - 1.5% per year, especially on individual and small group coverage.
- Impact of underwriting: As individuals are reviewed by carriers for medical conditions at time of enrollment, more healthy individuals are enrolled. As time passes, the impact of this underwriting selection wears off and as a result the average costs increase by as much as 2% - 3% per year.
- Deductible leveraging: As costs have increased over the years, individuals have preferred higher deductible programs to keep their costs down. Effective trend rates are higher on higher deductible programs based upon a concept known as deductible leveraging, even though the underlying trend is identical to that for a lower deductible program. For example the effective trend for a $3,000 could be a third larger than for a lower deductible. For example, for an underlying trend of 10%, the leveraged trend for a $3,000 deductible is 13.2% or 3.2% greater than what is expected.
- Utilization trend: In addition to changes in what providers charge, the actual rate by which patients consume services is higher each year, by as much as 1% - 1.5% per year. Some services increase more rapidly.
- Unit costs vs. CPI: National CPI statistics for health care are based upon a common market basket of services and do not reflect a reasonable norm from which to expect health care services to follow. Recent CPI statistics show a general economic trend of no more than 3%, with their medical statistics showing 5% - 6%. Carrier trends have been even higher for many reasons including the above factors.
The Unique California Situation
In most states the insurance commissioner has the authority to regulate rates carriers use for some of their products. Historically in California, the commissioner's authority was somewhat limited. They required filing of some rates, but did not have the authority to stop a carrier from using a proposed rate or rate increase. They were able to exert some pressure, many times strong pressure, to stop a carrier from large rate increases, but if a carrier wanted to proceed they usually had the right to do so.
In recent years, the department resorted to some public pressure, some negative PR, and essentially threats to the carriers. The proposed initiative gives them the "authority" to do something meaningful, not just veiled threats. So as far as that is concerned, it is good to give more real enablement to do something meaningful to hold all carriers accountable for their actions. I do not believe there is any real concern about carrier behavior, at least among the major players.
The Real Issue
It's always better to deal with the real cause of the problem, not just undesirable symptoms. If headaches are caused by a brain tumor, it is better to fix or remove the tumor, not just take a stronger pain killer. If the Insurance Rate Public Justification and Accountability Act is to fix the healthcare cost problem, then it is taking action on a symptom of the problem, not the real cause.
As discussed above, there are multiple reasons why health insurance premiums increase. Regulating the carriers alone doesn't solve any of the underlying problems. It restricts the behavior of one of the middlemen. It doesn't get to the core problem. It definitely will have an impact, but if not kept in check, will create perhaps even greater problems, potentially driving some carriers out of the market and perhaps transferring more of the problem to additional government bureaucracy.
Although the author is not a big fan of increased government regulation, some regulation or legislation focused on the prices providers are able to charge for services might be more beneficial. At least the major driving force of premium rate increases would be more stable and controlled which would keep premiums more in line.
Although fraught with additional challenges, my favorite solution to the provider charge driver is a shift from today's system which has different prices for different payers to a system where all payers pay the same price (i.e., called the all-payer system). No matter what type of coverage a person has, the carrier/administrator would be charged the same price. This means that there would be no bias against government payers vs. private sector payers. This would increase the cost for the government for Medicaid, but would substantially reduce what the private sector pays.
Our firm's analysis shows that setting the prices at Medicare payment levels for all patients would actually be a close proxy for a reasonable price. Private sector prices would drop in most markets by 15% - 17%. Medicaid prices would be increased to a reasonable Medicare payment level. Providers would have no reason not to take any patient since each patient brings the same revenue.
This would also level the playing ground for managed care plans and carriers since network differences would be eliminated. The plans could compete on more important items such as care management effectiveness, clinical efficacy, comparative effectiveness, and quality of the provider network.
Under this approach, Medicare would be the agency essentially regulating the reasonableness of prices. Significant administrative costs would be eliminated from both the carriers and the providers.
There would be a cost to the various states for raising the price they have to pay for Medicaid beneficiaries since they often have to pay 50% of the cost of these patients. Some of this could be offset by some increased federal payments from the savings generated in the system.
California's proposed initiative is interesting but probably not as big of a deal as it could be. Here's hoping for some "real" legislation that could save more of us more "real" dollars and eliminate some of the administrative costs of the current system.