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Some teeth for Dave Jones

Blue Shield's defiance over rate increases shows the need to give the insurance commissioner some real authority over health insurance premiums.

January 18, 2011

Health insurer Blue Shield says it won't comply with Insurance Commissioner Dave Jones' request to delay its latest double-digit rate increase until May. Instead, it has hired an independent actuary to go over the calculations supporting the new premiums for individual policies, which are due to take effect March 1. That's not much of a concession, given that a new state law requires insurers to submit any changes in rates to actuarial review. But maybe some good will come from this: With luck, the company's defiance will prompt Sacramento to give Jones some real authority over health insurance premiums.

California is one of about two dozen states that allow health insurers to set premiums for individual policies without prior approval from regulators. State law gives Jones the power to reject rates only if insurers spend less than 70% of their premium revenues on their subscribers' healthcare bills. Jones proposed an emergency order this month that would raise the threshold to 80%, in keeping with the requirements of the new federal healthcare reform law.

At first blush, this "medical loss ratio" might seem to provide plenty of protection for California consumers. In fact, the cap amplifies the perverse incentives that already are driving up healthcare costs much faster than the rate of inflation. The cap makes it hard for insurers to raise premiums unless their payments to doctors and hospitals increase. It also limits the percentage of their revenue that goes to profits and overhead, but not the total amount. So the easiest way for insurers to drive up profits is to pay doctors and hospitals more, then jack up premiums.

Nor can consumers count on competition among insurers to help restrain prices. Seemingly every leading provider of individual policies has slapped customers with double-digit increases in recent months.

Insurers claim that they're losing millions of dollars in the individual market, and will continue to do so even with the higher premiums. But allowing them simply to pass those increases along to consumers, who will be required by federal law to carry insurance starting in 2014, discourages insurers from working with doctors, hospitals and other healthcare providers to hold down costs through fundamental changes in the way care is delivered and paid for — for example, by rewarding doctors for keeping patients healthy rather than for treating their ailments.

That's why legislators should back a proposal by Assemblyman Mike Feuer (D- Los Angeles) to give the insurance commissioner's office the same power to reject excessive rate increases that it has over property, liability and casualty policies. The point isn't to force insurers to lose money on individual policies — that would only push them out of the market. It's to align them with their customers' interests in a more efficient, higher-quality healthcare system that keeps costs within reach.

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