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Health insurance premiums are increasing at a rate faster than medical inflation, especially in the volatile individual and small group markets, and worker incomes have not kept pace. The passage of the federal reform law triggered further outsized increases by insurance companies apparently seeking to establish high base rates in advance of the law’s implementation.

Consumers are increasingly unable to afford the coverage they have, and more and more are being priced out of private health coverage altogether. The number of uninsured increased by 7 million between 2004 and 2010, and the losses began before Americans began losing jobs to the recession. The nation’s total uninsured rose to 49 million by 2010.

The federal health reform law seeks to expand access to health care through this private insurance system, by providing subsidies for low‐income consumers, mandating that everyone purchase insurance, and reforming insurance industry practices. However, no provision of the federal law controls what health insurers can charge.

With federal health reform reliant on the ability of consumers to obtain private insurance, affordability is the key to successfully expanding access to care. The evidence in this report leads to the conclusion that direct, robust regulation of insurance rates, with a formal right of public intervention in rate proceedings, is necessary to ensure affordability and fairness while preserving a healthy, competitive health insurance market. The most comprehensive model for such regulation comes not from the world of health insurance, but from Proposition 103, a voter-­passed law in California that requires prior review and approval of rates in the property and casualty markets.

The chief findings of our report "Health Reform and Rate Regulation: Can't Have One Without The Other" are:

Premiums are rising in Massachusetts, despite the individual mandate
Massachusetts, the model for federal health reform, demonstrates the necessity of pairing health reform with strong rate regulation. Despite hopes that the individual mandate would, by itself, bring healthy people into the system and lower costs, Massachusetts is hard‐pressed to maintain affordability. Premiums in the state remain the second-­highest in the nation and rising costs are threatening to unbalance the state budget. Late in the game, Massachusetts is racing to strengthen rate regulation on the fly, while rate and cost increases threaten the viability of reform.

Tough regulation can bring down rates, if enforced
Industry self-­regulation and lax oversight in many states has failed to contain premiums. Public outrage over recent hikes has exposed a pattern of unnecessary rate increases and manipulation of data by the insurance industry that highlights the need for greater scrutiny of rates. Independent examinations of health insurance rate hike requests have uncovered math errors favoring the insurers, indications that rates were deliberately padded, and exaggerated projections of future losses. State regulatory staff describe playing a “cat and mouse” game with insurers to find the bloat and eliminate it.

States that are moving to add or strengthen prior approval regulation are showing some success in reducing the rate of premium increases and keeping the insurance industry honest. Oregon and Maine have backed down insurer rate hikes in individual markets by taking overall corporate profitability and excessive surplus into account. New York is seeing smaller rate hike requests since restoring prior approval, and is reducing the requests further. Still, state enforcement is irregular—Connecticut provides a stark example, with a rate hike up of to 49% approved one month and a 20% rate hike sought by the same company denied in the next month, after a new insurance regulator was appointed.

California property insurance regulation shows keys to success
A stable and highly successful model for rate regulation exists in California’s property and casualty insurance market. Proposition 103 has saved consumers billions, and maintained a profitable and competitive insurance market in the state.

Proposition 103’s key components — a requirement that every rate be approved by the insurance commissioner before taking effect, detailed but flexible requirements that prevent insurers from passing on excessive administrative costs and profits to consumers, and a right for consumers to independently challenge rates and be reimbursed by the insurers for their time — provide the regulatory framework needed to protect health insurance consumers from unjustified rate hikes. Various states mirror elements of its regulatory framework, but none match all of its provisions.

States should regulate rates, with federal backup if they fail

Although the federal reform law encourages oversight, none of its provisions require effective prior approval of rates.

Insurance regulation should remain a state responsibility, with the Department of Health and Human Services encouraging prior approval regulation through its bully pulpit and grant-making powers. Congress should grant HHS the right to directly oversee rates only when states fail to enact or enforce prior approval laws and the right of consumer participation.

Whether the federal health insurance purchase mandate survives its current battle in the courts and in Congress, or alternative are developed, this report concludes that states and federal officials must focus on developing more protective health insurance rate oversight. Without strong regulation, health insurance will become increasingly unaffordable and the federal reform law will fail in its primary goal of expanding access to health coverage.

Click here to download our report - "Health Reform and Rate Regulation: Can't Have One Without The Other"