The Question:

Should changes in some health insurance rates require the Insurance Commissioner’s approval before going into effect?

The Situation:

Health care plans are regulated by either the California Department of Insurance (CDI) or the California Department of Managed Health Care (DMHC). The DMHC is run by a director appointed by the Governor, while the CDI is run by the elected Insurance Commissioner. The majority of Californians (about 77%) are insured by either large-group employee plans or government programs. About 16% are covered by individual or small-group (50 or fewer employees) employer plans. (The remaining 7% are uninsured.) Proposed rate changes for these individual and small-group plans are reviewed by the DMHC or the Insurance Commissioner, who may declare them “unreasonable” but has no authority to reject them. Insurance companies pay a fee to cover the costs of each department’s activities.

A new player on the health care scene is Covered California, the health insurance exchange set up by the state as a result of the federal Affordable Care Act (ACA). The Covered California Board is authorized to negotiate rates and other characteristics with companies that want to sell their product through the exchange. After Covered California’s negotiations are completed, rates are subject to review by the carriers’ respective regulator (either DMHC or CDI). This review does not include specific authority to reject rates. 

In 1988, voters passed Prop. 103, an initiative that created the elective office of Insurance Commissioner, and gave the Commissioner review and prior approval authority over automobile and homeowner’s insurance rates.

The Proposal:

Prop. 45 applies only to individual and employer small-group plans. The Insurance Commissioner would have to approve rate changes for those plans before they could be implemented. The application process would require the company to publicly disclose and justify its requested rates. Consumers or insurance companies could challenge the outcome in court. Rates in effect as far back as November 6, 2012 would be subject to refund if found to be excessive. Under Prop. 45, “rates” would be defined to include any charges that affect cost, such as co-payments, deductibles, installment fees, premium financing, and more. 

The DMHC would continue to review and regulate the small-group and individual insurers that it now oversees, but only the Insurance Commissioner could approve or reject their proposed rate changes. Insurance companies would continue to be charged a fee to cover the costs of administering the new law.

Prop. 45 would also prohibit the use of an individual’s credit history or the absence of prior insurance coverage when determining rates or eligibility for health, automobile, or homeowner’s insurance. In practice, insurance companies generally have not used such factors.

Fiscal Effect:

The CDI would have increased administrative costs, probably not exceeding the low millions of dollars in most years. Funding would come from the fees paid by insurance companies. No additional duties would be imposed on DMHC or Covered California, but their administrative costs might be affected by any delays in rate approval.

What a YES Vote Means: 

Rates for individual and small group health insurance would need to be approved by the Insurance Commissioner before taking effect. 

What a NO Vote Means: 

State regulators would continue to have the authority to review, but not approve, rates for individual and small group health insurance

Supporters Say:

• Spiraling health insurance rates have risen many times faster than inflation.
• Prop. 45 will control health insurance costs just as Prop. 103 successfully controlled auto insurance costs.
• Transparency required by Prop. 45 will help prevent unreasonable rate hikes.

Opponents Say:

• Prop. 45 adds another level of expensive bureaucracy to health care regulation.
• Decisions about health care should not be made by a politician.
• Marketplace negotiations under the ACA could be harmed by the new regulatory approach.