Actuarial Soundness” Defense Protects Insurers At Expense of Rate Regulation, Consumer Watchdog Says
Los Angeles, CA -- Anthem Blue Cross’s defense of its recent controversial premium increases will be codified in law under eleventh hour legislation by San Francisco State Senator Mark Leno, SB 1163, just as the California legislature is set to adjourn Tuesday night.
Consumer Watchdog, the group behind auto insurance regulation Prop 103 that has saved Californians $62 billion, warned that if health insurers can defend rates simply by having an actuary say the increases are “actuarial sound,” as Anthem Blue Cross did and Leno’s legislation provides, consumers will be in big trouble.
“It’s outrageous that a purportedly progressive San Francisco state senator would undermine the cause of premium regulation with last minute amendments that give health insurance companies their wish list of ways to raise rates without government regulators being able to stop them,” said Consumer Watchdog President Jamie Court. “It’s as though Leno is saying if you cannot beat the insurance industry with single payer legislation he backs, you might as well join them. All Californians will have to buy health insurance by 2014 or face tax penalties and Leno’s eleventh hour legislation gives insurers more latitude to raise rates.”
With the new amendments to Leno’s SB 1163, in the last days of session, insurers removed their opposition to the legislation stating it reiterates federal law and conforms to the Schwarzenegger administration’s position, articulated in a federal grant application, that regulators should not be able to approve or deny premium increases before they take effect. This undermines efforts to establish for health insurance the prior approval regulation system, enacted under Prop 103 in 1988, now covering auto and homeowners insurance – under which a regulator must review rates and deny those deemed “excessive.” The latest amendments in SB 1163 also specifically bar regulators from limiting what insurers can charge for coverage.
Consumer Watchdog said that making “actuarial soundness” the standard for reasonable health insurance rates is the insurers’ preferred approach because it is a term that allows for manipulation by accountants to defend double digit increases. Anthem Blue Cross recently used the excuse in defense of its recent premium hikes. From Los Angeles Times, July 29, 2010:
“While we made the decision to move forward with these revised rates, given the unique circumstances of the California individual market, this situation is not sustainable over the long term,” said [Angela Braly, Anthem/WellPoint CEO]. “WellPoint remains committed to serving individual members. However, in order to continue to serve customers, a carrier must be able to receive actuarially sound rates.”
The Leno bill would give insurers a legal justification for rates that would otherwise be excessive under a prior approval rate regulation system. Proposition 103 requires for auto insurers, as AB 2578 (Jones-Feuer) would for health insurers, that premiums be approved or denied by regulators before they take effect under the standard that they are not “excessive, inadequate or unfairly discriminatory.” The Leno approach allows insurers to hire “independent” actuaries to justify rates as they see fit without even a review process. SB 2578 has yet to have a vote on the Senate Floor.
In addition to August 18, 2010 amendments to SB 1163 that are designed to give insurance companies a legal basis – the "actuarially sound" rates standard – for justifying double digit rate hikes, new August 25 amendments continue to take health care in the wrong direction.
The August 25 amendments:
- Delete section 1385.06 (d) that previously stated SB 1163 does not limit the ability of regulator to challenge an insurer's claims that a rate increase is actuarially sound or even in compliance with state or federal laws.
- Add section 1385.06 (c) stating that, under the bill, regulators are not allowed to limit the rates insurers can charge.
- Delete section 1385.03 (b)(23) that would have required insurers to report the number of consumer complaints related to the health plans’ rates.
- Delete section 1385.11 (c) that would require the regulator to consider public comment as part of its rate hike review, instead requiring that the regulator merely post public comments on its website.
- Delete provisions that would have required health plans and insurers to clearly enumerate key health care cost drivers. [Section 1385.03(b) (18)].
- Limit the bill's requirement that health plans completely disclose "health care cost containment and quality improvement efforts," by giving insurers more discretion in determining what data must be reported [1385.03 (c)(3)].
“Actuarial soundness” has been debunked by industry experts as a meaningless term. Indeed, in 2008 testimony on behalf of the Personal Insurance Federation of California, Association of California Insurance Companies and American Insurance Association, former Department of Insurance Actuary Shawna Ackerman explained:
"There is no such criteria as 'most actuarially sound' in the actuarial community, actuarial literature or the Actuarial Standards of Practice. Ratemaking is prospective in nature, projecting the costs of events yet to occur. Thus, there will necessarily exist a range of reasonable choices, not a single 'most actuarially sound' choice."
Consumer Watchdog opposes SB 1163 (Leno) unless it is amended to remove Section 4 and 7 (proposed Health and Safety Code Article 6.2 and proposed Insurance Code Article 4.5 – "Review of Rate Increases").
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