The Need to Do Something — But SB 1440 Isn’t It

We elect politicians to solve problems. That’s their job. It’s what we pay them for. No one campaigns for office proclaiming their intent to accomplish nothing. There’s always some injustice to right. There’s always a mess to fix. So no one should be surprised that current lawmakers in Sacramento are desperate to do something about California’s health care system. After all, there are real problems in the current system.

But there’s a difference between lawmakers really addressing problems and simply looking like their addressing problems. Take Senate Bill 1440 authored by Senator Shiela Keuhl. The bill would require carriers to spend 85 percent of the premium they take in on medical care. As originally introduced, SB 1440 would have had a devastating impact on the individual health insurance market. It would have increased costs, decreased competition and made it nearly impossible for independent agents to assist consumers in finding the right plan for their needs.

Fortunately, SB 1440 has been substantially amended since its original introduction. As it reads today, the biggest problem with the bill is it requires carriers to segregate their Department of Managed Care regulated plans from those regulated by the Department of Insurance. While it’s not surprising regulators and legislators perceive these plans to be worthy of distinction, from a consumer’s point of view it’s a meaningless difference. Governor Arnold Schwarzenegger and Senator Keuhl should address this issue in their negotiations concerning the legislation. But that’s not the overriding problem with SB 1440.

What’s wrong with SB 1440 is that it won’t lower premiums, which is the stated purpose of the bill. The Rand Corporation in a report by Neeraj Sood and Eric Sun titled “Health Insurance Premiums in California: The Role of Administrative Cost and Profits” examined the results of similar legislation in other states. They found states with no Medical Loss Ration legislation spend statistically the same percentage of premium as those that regulated the entire market (83 percent and 84 percent, respectively). While it’s true that states limiting the loss ratio of all coverage (individual, small group and large group) set targets at levels lower than the 85 percent called for by SB 1440, the report suggests consumers are unlikely to benefit from any premium savings.

The reason is that profits and administrative costs aren’t the problem with skyrocketing health care costs; it’s the price of medical treatment that drives premiums. The study found that 85 percent of the increase in revenue per enrollee between 2002 and 2006 was the result of medical costs.

Lawmakers could address 85 percent of the problem. But that’s hard work. It requires examining the drivers of increased medical costs and making tough decisions on how to reduce their rate of increase. It’s far easier (if less impactful) to go after health insurance companies and HMOs. Never mind that, as reported by the Rand study, the profits of California HMOs are less than the profitability of the companies comprising the S&P 500. The reality is that, along with oil and tobacco companies, they are about as easy a political target as exists.

So lawmakers will pass SB 1440 and declare a blow against rising insurance premiums. They may not be able to pass a budget, but they can teach those insurance companies a lesson. The fact that the legislation won’t have much, if any, impact on premiums is irrelevant. The fact that it won’t bring medical inflation down to general inflation levels doesn’t matter.

Because while we pay them for results, we have a tendency to elect lawmakers based on appearances. Which means the underlying problem remains.