California adopting new insurance rate-setting rules

The legislation will require plans to justify their hikes but will not authorize the state to reject the increases outright.

By Emily Berry — Posted Sept. 13, 2010

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In recent times, California's insurance commissioner has forced some health plans to hire independent actuaries to determine if their requested rate increases complied with state law, which requires them to spend a certain minimum percentage of every premium dollar on medical care. Under a bill expected to get Gov. Arnold Schwarzenegger's signature, all insurance companies will have to hire actuaries for reviews if they want to raise rates. (See correction)

The bill requires that insurers' proposed rate increases filed with the state be "actuarially sound," and that plans pay for the analysis, which will note whether the increase is reasonable or unreasonable as defined by the Patient Protection and Affordable Care Act.

A plan may be allowed to implement the "unreasonable" increase if the actuarial analysis bears out why it's required, according to the bill, sponsored by state Sen. Mark Leno.

California, unlike some states, does not give its insurance commissioner the power to approve or disapprove health insurers' proposed rate increases. A bill that would have given regulators such authority failed in the state Senate.

However, California plans must spend at least 70% of their premiums on health care. The state's insurance commissioner, Steve Poizner, used that requirement as a means to deny WellPoint-owned Anthem Health Care a proposed maximum 39% and average 25% rate increase for individual plans, a hike that attracted the attention of the Obama administration and is widely credited with providing the final momentum for passage of the health system reform law.

Poizner hired an independent actuary that showed that math errors by Anthem led to the 39% rate increase request. Anthem withdrew its request in April, and on Aug. 26 Poizner's office accepted its revised request of a maximum 20% increase, and 14% average hike, for Anthem's individual plans.

In June, Poizner required California's major plans to submit to actuarial analysis. The legislation codifies his right to do so and set up a structure for how plans are to finance such review. The bill spells out that the actuary must have no corporate connections to the plan it is reviewing.

"This legislation will not only create greater transparency in health insurance rates, it will also lead to better consumer choices, more competitive plans and better overall cost-containment in our health care system," Schwarzenegger said in a news release after the bill's Aug. 31 passage.

Some criticized the legislation as not being strong enough, and some criticized legislators for killing a bill that would have given the insurance commissioner the right to approve rates.

"Sacramento politicians sided with health insurance companies to defeat rate regulation and let insurers charge whatever they want," said Doug Heller executive director of Consumer Watchdog, a consumer advocacy group.

The California Medical Assn. took a neutral position on the bill, spokesman Andrew LaMar said.

The California Legislature also passed a bill sponsored by Assemblyman Hector De La Torre banning insurance rescissions. The governor twice vetoed similar bills.

The health reform law outlaws rescissions except in cases of fraud, and all large insurers pledged to follow that ban even before it officially took effect Sept. 23.

The California Dept. of Insurance in August adopted new regulations that require insurers to provide thorough documentation of medical underwriting if they later want to rescind a policy. The Assn. of California Life & Health Insurance Companies sued to stop the state from enforcing the new rules, claiming the requirements were unnecessary and would force insurers to violate patient privacy.

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