Proposed Costly Government Rate Review to Increase Employer Health Care Premiums

Much of the Legislature is committed to identifying a path to achieving universal health coverage in California. With the most obvious barrier to that being the extraordinary cost, why would a bill that will significantly increase health plan administrative costs be making its way through the Legislature?

In 2017, achieving universal health coverage was the reason for the formation of the Select Committee on Health Care Delivery Systems and Universal Coverage in California. The goal was to understand California’s current health care delivery systems and to identify the path towards universal health coverage. One of the several takeaways from the series of hearings in 2017 and 2018 was to reduce health plan administrative costs. The irony is that even with 5 hearings and a report of findings with a recommendation to reduce health plan administrative costs, AB 731 (Kalra), which will significantly increase health plan administrative costs, continues to make its way through the legislature.

AB 731 mandates rate review of large group contracts such as those between health plans/insurers and large employers with 100 and more employees. It would require health plans and insurers to file over 17,000 contracts with the Department of Managed Health Care (DMHC) or Department of Insurance (CDI). These are contracts that have been thoroughly negotiated and accepted by both parties to the contract; the plan and the employer. The two departments would have to review all of those contracts/filings and make a determination whether the policy rate is unreasonable or if all the required data was not provided, unjustified. The departments would not have authority to deny a rate or guarantee a decrease in health care premiums.

On the contrary, what this bill can guarantee is that there will be increased administrative costs to health plans/insurers, as well as increased operating costs for DMHC and CDI. DHMC operating costs are funded by health plans which would mean employers and employees would be impacted twice, by shouldering the increased premiums resulting from increased administrative costs to health plans directly, as well as the operating costs for DMHC which health plans are required to fund.

It’s unclear why rate review on the large group market would be sought now. During the enactment of the Patient Protection and Affordable Care Act (PPACA), the individual and small group market was subjected to rate review but the large group market was explicitly exempted. The Department of Health and Human Services specifically stated during the regulation drafting process that regulation for rate review would only apply to the individual and small group market because “purchasers in the large group market have greater leverage than those in the individual and small group markets, and therefore may be better able to avoid imposition of unreasonable rate increases.”

It was understood that large group contracts were highly sought after by health plans and insurers and fully negotiated by large employers. Those competitive pressures have kept premium increases in the large group market historically lower than the small group and individual market in California, with large group market premium increases at less than half that of the individual market. In fact, large group premium increases have not gone above 5.7% whereas small group market premiums have increased by as much 7.9% and individual premiums have increased by as much as 13.2%, even though both are currently subject to rate review.

There is little disagreement that health care costs are rising and continuing to increase premiums for all markets, regardless of rate review. Increasing health plan administrative costs by mandating rate review on the most premium stable health care market in California makes little sense.

Karen Sarkissian, Policy Advocate