December 20, 2011
Pursuant to Elections Code Section 9005, we have reviewed a proposed
statutory initiative related to health, home, and automobile insurance
rates (A.G. File No. 11‑0072).
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. State law also requires
health insurers to file information on “unreasonable” rates (as defined
by federal law) for large group insurance policies 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 also authorizes the Insurance
Commissioner to approve rates for large group policies if (1) the
employer or collective bargaining group files a petition requiring such
approval or (2) the proposed rate increase exceeds a certain percentage.
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 be in the
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:
- Increased state administrative costs in the 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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