Californians are struggling to pay their health insurance bills while insurance companies' profits are on the rise. One apparent fix is Assembly Bill 52 authored by Mike Feuer, D-Los Angeles, that would allow state regulators to reject excessive rate increases. However, the recent experience of Massachusetts suggests that this California bill may not go nearly far enough.
Massachusetts and 34 other states have some form of the rate regulation powers that the California Assembly will be voting on Friday. It wasn't until last year, though, that Massachusetts actually used its power to reject proposed rate increases. The insurers sued but ultimately reached a settlement which involved lower rate increases.
Mission accomplished, right? Not quite. Since Massachusetts continued to have very high insurance rates, its Legislature passed a bill that would pre-emptively reject large increases. And then the story gets really interesting. This year, Massachusetts is considering a bill that would allow regulators to reject high rates paid by insurers to hospitals, not just high rates charged by insurers to the public.
What Massachusetts is proposing is, in effect, a form of provider rate setting. This is a strategy that can work. In his testimony before the California Legislature, UCLA professor Gerald Kominski pointed to the experience of Maryland. It has had a hospital rate setting program in place since the 1970s and has seen a relatively low rate of health care cost growth. He pointed out that, "if the national growth rate had matched Maryland's growth rate from 1974 to 2007, we would have saved $1.8 trillion in health expenditures as a nation."
Even in health care, $1.8 trillion is a significant chunk of change and would mean real savings for people struggling to pay their health insurance premiums.
Rate setting goes at the primary source of increases in health care spending: rising payments to hospitals, doctors, pharmaceutical companies and other providers of health care goods and services. Rate setting for providers is how Medicare has been able to keep its costs down relative to the private market; it is one of the primary tools that allows other countries around the world to pay far less for health care than we do, and get much better value for their medical spending.
States that have attempted to control health care costs solely through focusing on the rate increases of insurance companies, on the other hand, have not had very much success. Seven of the 10 states with the lowest health insurance rate increases do not have prior approval rate regulation. This list includes California where our rates are right at the national average in spite of our high cost of living.
The reason that focusing on insurance companies alone doesn't work is that they simply aren't a main cause of rising health care costs. The executive salaries and profits of this industry might be excessive, even offensive. The sum total of all insurance company administrative costs, though, is less than 7 cents of each health care dollar.
The vast majority of these health care costs are payments to providers. Provider rate setting, therefore, is where we are going to have to go if we want to use regulation to bring down health care costs. The experience of Massachusetts suggests that we are likely to move down this path very quickly.
This rapid progression is good if we want to lower health insurance premiums as soon as possible. There is a real health care affordability crisis in the United States, and we cannot wait until 2014 – when federal health care reform kicks in – to solve it. On the other hand, this regulatory approach is being sold to the public as going after the profits of insurance companies rather than after the income of doctors and hospitals. And that's not the complete story.