In response to several years of double-digit health insurance premium inflation, and with no end in sight, California Senate Bill 26 (SB 26) was introduced in 2003 to curtail insurance premium growth. To better understand the potential impact of SB 26 and similar proposals, CHCF funded RAND Health to analyze the likely effects of premium regulation on the California health insurance market.

SB 26 would have required that premium increases be approved by the Department of Insurance or the Department of Managed Health Care. Health plans would have been required to reimburse policyholders for premium increases (with interest) imposed between April 1, 2000 and January 1, 2004, unless the increases were approved retroactively. Although SB 26 did not pass out of committee in 2003, proponents of premium regulation are likely to continue to pursue the idea, perhaps through new legislation or a future ballot initiative.

Should California Regulate Health Insurance Premiums? evaluates why health insurance premiums are rising and examines the potential long-term consequences of regulating premium costs, using examples from other insurance products such as automobile coverage and workers' compensation. It also reviews California's experience with Proposition 103, which was the impetus for SB 26. Passed in 1998, Proposition 103 required prior-approval of auto insurance premium increases. The discussion highlights the differences between the health insurance and auto insurance markets and describes how these differences might affect conclusions regarding the likely long-term consequences of health insurance premium regulation.

According to Marian Mulkey, CHCF program officer, "While health care premiums are rising in California, HMO profits have remained flat. Profitability is only one component of costs. Other components include new technology, more use of expensive services, more prescription drugs, expansion of insurance coverage and mandated benefits, and demographic changes." Mulkey adds, "Regulatory requirements such as those proposed under SB 26 would only restrict growth in premiums. They would not address the underlying reasons for that growth."

The report underscores that if health care costs continue to rise while premiums are frozen, stringent rate regulation could lead to undesired consequences. These include:

• In the short term, insurers could balance their losses by reducing the quality or quantity of care — or both.
• Insurers could discourage unhealthy consumers from enrolling in plans, thus increasing the number of uninsured over time.
• If costs continue to rise and premiums are fixed, insurers may exit the market entirely.
• Over the longer term, regulation could discourage expensive treatments and technologies, no matter how beneficial, from coming to market. (A desirable related consequence is that premium regulation could motivate the introduction of cost-saving technologies.)

  The report’s lead author, Neeraj Sood, RAND, adds, "We’ve determined that SB 26 would limit premium growth in the short run. However — without modification — it would do little to cure the root causes of health care inflation, thus making California vulnerable to undesirable long-term consequences, including greater numbers of uninsured and reduced quality or rationing of medical care."

  Pre-approval rate regulation as proposed by SB 26 is new to health insurance markets. However, prior experiences with rate regulation of other insurance products, such as auto insurance and workers’ compensation, may provide important lessons for California. Rate regulation in other insurance markets has resulted in less access to coverage for high-risk individuals, fewer insurers participating in the market, and less incentive for individuals to control costs. These undesirable effects are likely to occur in the health insurance market if health care costs continue to rise while premiums are restricted.