Health Insurance Regulation Advances in California

To address the misuse of health insurance premiums, legislators in California recently passed tougher standards regulating how insurance companies use premiums.  The law is designed to put teeth into the basic expectation that health insurance premiums paid by families and businesses should be used by insurance companies for actual medical care.  Sponsored by State Senator Sheila Kuehl, legislators passed SB 1440, which creates a "medical loss ratio" of 85% - or "care share" - requiring insurance companies to spend at least 85-cents of every premium-dollar on actual medical care.  Governor Schwarzenegger has yet to act on the bill, but the legislation was amended at his request to exempt new plans from the 85% threshold for the first two years they are available, signaling that his signature is likely.

The unfortunate reality is that many insurance companies rarely meet this standard.  In a survey of state insurance regulators conducted earlier this year, Families USA found instances where insurance companies spent a mere 60% of premiums in the individual market on medical care, using the rest for profits and administrative expenses - including staff charged with knocking insured people off the insurance roles.  

The California legislation builds on similar legislation in other states.  New Jersey has a "care share" requirement of 75% for the individual and small group markets.  If less than 75-cents of every premium dollar is spent on direct medical care, an insurer must issue the difference in refunds to their members.  Families USA reports that insurers have refunded policyholders $11.6 million since the early 1990's.  Minnesota has a tiered loss ratio, setting different levels for the large group, small group, and individual markets.  A bill introduced this session in Pennsylvania, HB 2005, would also set a standard similar to California's for the small group market.

Creating a Stronger Standard: "Medical loss ratios", or "care shares", are important regulations to ensure families and small businesses are getting value for their premium payments.  An even stronger measure than the California bill can be found in Massachusetts Senate Bill 593, sponsored by State Sen. Patricia Jehlen.  The care share legislation, titled An Act Relative to Promoting the Efficient Use of Health Care Revenues, would set a 90% standard and include other forms of income that are derived from premiums paid, including insurers' investment income.  A 2006 report from the Health Reform Program at the Boston University School of Public Health found that some Massachusetts insurers were spending 91% of total revenues on medical care for group plans, indicating that a 90% threshold is quite attainable for the market.

With skyrocketing insurance company profits and reserves, state lawmakers should ensure that our health care dollars are being used for actual medical care, rather than profits and shareholder dividends.  Additionally, stronger standards can encourage health insurers to increase efficiency and reduce administrative waste.  Despite, or perhaps because, the US lacks a coordinated health care system that achieves coverage for all Americans, our administrative costs - as a share of total health care spending - are 30% to 70% higher than in countries with public/private universal systems.  There is clearly room for improvement, particularly considering that within the US system, administrative expenses for private insurance are two and a half times as high as for public programs.