December 16, 2011
Pursuant to Elections Code 9005, we have reviewed a
proposed statutory initiative related to health, home, and automobile
insurance rates (A.G. File No. 11‑0070).
Background
Insurance Regulation. Various types of insurance are sold in
California, including health, home, and automobile. Existing state law
imposes a variety of requirements on companies providing insurance
coverage in California. For example, state law authorizes the Insurance
Commissioner, who heads the California Department of Insurance (CDI), to
regulate companies that offer home and automobile insurance, as well as
certain types of health insurance (known as indemnity insurance) that
provide coverage for hospital, medical, or surgical benefits. The
Department of Managed Health Care (DMHC) is authorized to regulate
companies that offer other types of health insurance coverage, such as
health maintenance organizations. Under current law, insurers pay
various fees (such as filing fees) to CDI and DMHC to cover the costs of
regulation. The revenue from these fees are appropriated each year by
the Legislature and are available for expenditure upon enactment of the
annual state budget.
Review of Certain Health Insurance Rates. Existing state law
requires health insurers to file information on rates for all individual
and small group (typically consisting of no more than 50 employees)
policies with the appropriate regulatory department at least 60 days
before those rates go into effect. Although the Insurance Commissioner
and DMHC review such health insurance rates, they are not statutorily
authorized to approve these rates before they take effect. Under current
law, the state generally requires insurers to provide a minimum level of
health care services, which is commonly referred to as a benefits
package.
Approval of Automobile Insurance Rates. In 1988, California
voters approved Proposition 103, which requires the Insurance
Commissioner to review and approve rate changes for automobile insurance
before such changes take effect. The proposition also requires that the
rate changes not be excessive, inadequate, or unfairly discriminatory.
In general, the Insurance Commissioner is required to hold public
hearings on proposed rate changes whenever they exceed certain
percentages. In addition, a consumer can request that a hearing be held
on a particular rate change.
Insurance Premium and Corporation Tax. Under current law,
insurance companies doing business in California generally pay an
insurance premium tax instead of the state corporate income tax. The tax
is based on the amount of insurance premiums earned in the state each
year. However, companies that offer certain types of health insurance
products—specifically, those regulated by DMHC—are required to pay the
corporation tax.
Proposal
Definition and Approval of Health Insurance Rates. For the
purposes of CDI's regulations, this measure broadens the definition of
health insurance "rates" to include certain other factors beyond
premiums, such as benefits, discounts, co-payments, and deductibles. The
measure also changes the state’s process for regulating health insurance
rates to be more aligned with the regulation of automobile insurance, as
established by Proposition 103. Specifically, the measure requires the
Insurance Commissioner to approve all health insurance rates for
individual and small group policies before they take effect, including
certain types of health insurance coverage currently regulated only by
DMHC.
The measure does not explicitly repeal any of the
statutory requirements for DMHC to review certain health insurance rates
and benefits packages. As a result, it is possible that under this
measure, both CDI and DMHC would conduct rate reviews of some of the
same health insurance policies, with CDI having the sole authority to
approve the proposed rates.
Insurance Filing Fees. Under the measure, revenues from the
filing fees paid by insurance companies would be continuously
appropriated (meaning a legislative appropriation is not required) to
cover any operational or administrative costs resulting from the
provisions of this measure.
Credit History. The measure also states that an individual's
credit history shall not be used for determining eligibility for a
health, automobile, or homeowner's insurance policy, or generally for
rates, premiums, and insurability.
Fiscal Effects
Increased State Administrative Costs. This measure would result
in additional costs for CDI to conduct health insurance rate reviews and
hearings pursuant to the provisions of this measure. These additional
administrative costs would likely range in the low millions to low tens
of millions of dollars annually. Under the measure, these costs would be
funded from the revenue collected by filing fees on the insurance
industry.
Potential Change in Revenues. This measure could change health
insurance rates and therefore affect insurance premium tax revenues. For
example, if rate regulation had the effect of lowering insurance rates,
then this would tend to lead to a reduction in those revenues. The
amount of a change, if any, in taxes that health insurance companies pay
is unknown and would depend on if this measure resulted in lower
insurance rates.
Summary of Fiscal Effects
We estimate that this measure would have the
following major fiscal effect:
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Increased state administrative costs
ranging in the low millions to low tens of millions of dollars annually
to regulate health insurance rates, funded with revenues collected from
filing fees paid by health insurance companies.
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