Understanding the national implications of CA's controversial Prop 45

With one week left to go until Election Day, arguments for and against California’s controversial Proposition 45 ballot initiative are heating up, with representatives for and against the ballot appealing to California voters.

Earlier this month the National Association of Health Underwriters urged Californians to vote no on the proposition, which would require the state’s insurance commissioner to approve rate changes for individual and employer small-group plans. While just this week the Consumer Watchdog issued a release chiding the insurance industry for spending $55 million to defeat the measure. The consumer advocacy group has largely funded the measure and is urging Californians to vote yes on the ballot initiative Nov. 4.

See related story: NAHU working to defeat California’s controversial Proposition 45

Supporters of the measure argue that spiraling health insurance rates have risen faster than inflation and the transparency required by Prop. 45 will help prevent unreasonable hikes.

Opponents of the measure say it won’t deliver on those promises and gives one politician an unprecedented amount of power to regulate insurance rates in the state.

Current regulation

Currently in California, health insurance companies are required to file information on proposed rates for all individual and small group health insurance with either the Department of Managed Health Care (DMHC) or the California Department of Insurance (CDI) before those rates can go into effect. Insurance companies are not required to file large group rate information.

Both DMHC and CDI review the rate information and say whether the rate increases are reasonable or not. The regulators evaluate reasonableness based on several factors, including which medical benefits are covered, what portion of the costs enrollees pay through copayments and deductibles, and whether a company’s administrative costs are reasonable. The departments are also required to make certain information from these reviews available to the public on their websites. DMHC and CDI currently don’t have any authority to reject or approve the rates before they take effect.

What’s in the proposal?

California’s Proposition 45 would require insurance companies to publicly disclose and justify its requested rates. The Insurance Commissioner would have to approve rate changes for those plans before they could be implemented.

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.

With so much at stake, it’s not surprising insurance companies are campaigning hard against the measure. According to Consumer Watchdog’s CEO Jamie Court, several insurance companies recently gave another $12 million to their campaign to defeat Proposition 45, an amount he says illustrates the companies “are panicked that the public will learn the truth about their opposition to Prop 45 and support its controls against rate hikes.”

"The industry is worried that with enough light and air around the election the public will learn the truth that insurance companies are opposed to Prop 45 because it gives California the power 35 other states already have to reject excessive rates,” he adds.

But opponents of the measure argue that although a number of states have laws that empower the Department of Insurance to review rates before they are approved, no state empowers a single politician to regulate and reject rate hikes.

NAHU CEO Janet Trautwein says the association is “deeply concerned that this proposition may be misunderstood by many people and that some may see this measure as beneficial. Nothing could be further from the truth.”

If passed, she says, “Prop 45 would give one politician the power to regulate rates, costs, benefits and treatment options that health insurance covers, thereby opening the door to detrimental regulation of the insurance industry nationwide.”

Increased litigation

Rates in effect as far back as Nov. 6, 2012 would be subject to refund if found to be excessive under Prop. 45. The measure also allows consumers and insurance companies to challenge the outcome of the approval process in court.

Neil Crosby, vice president of public affairs for the California Association of Health Underwriters, calls the litigation that could result from the proposition troubling.

“One of the things that’s written into the Proposition that would become law is that intervener trial lawyer firms could sue any carrier that has applied for a change and the health plan has to pay the intervener law firm up to $675 an hour,” he says.

“It’s a crazy proposition that we’re facing,” says Crosby, adding that such litigation would massively delay the ability of carriers to offer a product for consumers.

In fact, he notes, several of the top contributors to the ballot initiative are trial lawyer groups, including Greene Broillet & Wheeler LLP and Consumer Attorneys of California.

NAHU is one of the top five contributors to the campaign against the Proposition, which also includes health insurers Kaiser Permanente, WellPoint and Blue Cross Blue Shield.