AB 2578: Proposition 103 Coming to Managed Health Care?

Posted on March 25, 2010 by Barger & Wolen LLP

by Richard De La Mora

Having unsuccessfully urged Congress to impose a national freeze on health insurance rates, Harvey Rosenfield has refocused his efforts on the California legislature and AB 2578.

Who is Harvey Rosenfield? He is, in his own words, the “author of California’s landmark property-casualty insurance rate regulation Proposition 103 – recognized as the most successful rate regulation in the country.” In fact, AB 2578, which cleared Assembly Health Committee earlier this week, includes the following provisions modeled closely on Proposition 103:

  • A prohibition on the use or approval of rates that are “excessive, inadequate, or unfairly discriminatory”;
  • A right for consumer advocates to request a hearing on a rate application, and a requirement that a hearing be granted whenever the rate increase sought exceeds 7%.

Finally, Mr. Rosenfield has made sure that he and his friends in the consumer advocacy industry are taken care of by advocating a provision requiring health plans to pay the consumer advocacy fees associated with fighting the health plan’s rate application.    

We have seen this played out before, as our firm has represented property-casualty insurers in administrative and judicial matters involving insurance rates regulated under Proposition 103 since 1989.

While property-casualty insurers have had plenty of time to adjust to the dictates of rate regulation, health plans will face a steep learning curve if AB 2578 becomes law. 

We are hopeful that this legislation will not become law. Even if it does, AB 2578 will likely face legal challenges and hurdles as did Proposition 103.

From our experience, we learned some of those challenges will be more successful than others. Nevertheless, if rate regulation comes to pass, a company’s goals can still be achieved provided that it has a complete understanding of the proposed regulatory system, plans ahead, has input into the development of regulations, and prepares itself for life after the system is implemented.

Barger & Wolen will continue to keep our clients and friends apprised on new issues pertaining to AB 2578 via the firm’s Insurance Litigation & Regulatory Law Blog and the Life, Health & Disability Law Blog. If you would like to be notified about upcoming events and seminars pertaining to AB 2578 and other issues, please subscribe to our blog via the RSS feed or add your e-mail in the left column.

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Bending the Health Care Cost Curve

Posted on March 17, 2010 by Gregory Eisenreich

We are inundated with news reports and talking heads discussing "health care reform" or "ObamaCare."  Always a favorite target, insurers are scrutinized for proposed premium rate increases and we hear calls for Congressional hearings on the topic.

What is absent from the noise is an intelligent discussion of what the government can and can't legally do.

For example, on March 3, 2010, the Ninth Circuit Court of Appeals issued an opinion in California Pharmacists Association, et al. v. David Maxwell-Jolly, Director of The California Department of Health Services enjoining California's legislative attempt at reducing payments to medical service providers by five percent under the State's Medicaid program.

The Court held that the State must establish reimbursement rates that are (1) consistent with high-quality medical care and (2) sufficient to enlist enough providers to ensure that medical services are generally available to Medicaid recipients.

In other words, under the Federal Medicaid Act, a State cannot pick a rate that may lead to rationing or shortages in the market place. Apparently, California's legislature failed to conduct the necessary analysis before attempting to mandate lower reimbursement rates.

The government's ability to fix prices is ultimately constrained by the very instrument that gives the government its legitamacy, the United States Constitution. California has a long history of insurance premium rate regulation and the Courts have recognized that the Constitution places very real limits on what the government can do.

California's Proposition 103 was passed in 1988 and attempted to require insurer's to “rollback” by 20% the premium on policies of property and casualty insurance issued or renewed after November 8, 1988. Proposition 103 allowed relief from the 20% rate rollback requirement only if an insurer could establish that it was “substantially threatened with insolvency.”

In Calfarm v. Deukmejian, 48 Cal.3d 805 (1989), the California Supreme Court struck down the “insolvency” standard for relief from the rollback requirement. To replace that standard the Court held that an insurer must be granted relief from the rollback if it would deny the insurer the “possibility of a just and reasonable return” on its Proposition 103 lines of business. Calfarm, supra at 816, 820-825.  Specifically, the Court stated at page 817:  

[t]he concept that rates may be set at less than a fair rate of return in order to compel the return of the past surpluses is not one supported by precedent. ‘The just compensation safeguarded . . . by the Fourteenth Amendment [of the Constitution] is a reasonable return on the value of the property used at the time that it is being used for the public service . . . . [T]he law does not require the company to give up for the benefit of future subscribers any part of is accumulations from past operations. Profits of the past cannot be used to sustain confiscatory rates for the future.’

So, as we hear calls for hearings on health insurance premium rates and politicians making promises regarding what health insurers will be required to provide and do under proposed health care reforms, remember that every service promised comes with a cost. A cost for which the health insurer has the Constitutional right to charge a premium sufficient to reimburse its cost and provide it with a fair rate of return [profit].

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