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Why Are Health Insurance Rates in California So High?

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Everyone’s talking about health reform and its estimated additional increases of 3 percent to 6 percent on health care costs. But not many people have talked or written about the other factors affecting the increasing costs in California.

Our state has out-accelerated all of the national trends in every survey and report available on health care. This inevitably leads to some difficult questions from clients. When I present them with these kinds of insurance renewal increases, I’m often asked, “Our claims are good. I read that the national average increase is 9 percent. So why are we getting 14 percent?”

No matter what your end renewal result is, after fierce negotiations and cost shifting, clients still need to know why rates are skyrocketing.

So, why are California medical insurance rate increases outpacing the rest of the country?

Despite the fact that the cost of living is so high in California, I shock my clients when I tell them that, here in California, we have traditionally had the lowest medical insurance rates in the nation. However, we’re working hard to catch up.

Managed care was born in the West

Before our modern health care system was invented, people were cared for in their home by family members or charitable organizations that brought them to community based facilities. Because there wasn’t much doctors could do, most serious illnesses ran their course and an ill or injured person either got better or died.

In the early 1900s, hospitals’ capabilities to treat diseases grew, and the cost became fairly expensive. During this time, Blue Cross, followed by Blue Shield, began selling prepaid insurance plans that covered hospital and physician services. These policies were generally used for catastrophic illness and injury. About the same time, California industrialist Henry Kaiser began providing medical services to his employees, as a benefit. Harold Hatch, an enterprising insurance agent and Dr. Sidney Garfield who was treating Kaiser employees in the Mojave Desert, devised a plan that, at five cents a day, covered all medical care and helped Kaiser recruit employees.

In 1944, the Kaiser Permanente Plan opened up to the general public and the first health management organization or HMO was born. California is now currently dominated by the managed care model and HMO participants vastly outnumber PPO participants.

In an effort to compete, many other HMO operations opened and flourished using the prepaid for services model. This gave us the highest concentration of doctors, the most competition for patients, and the most controlled rates in the entire nation. So what’s happened to our advantage and the low rates?

Narrowing of the markets

When I first began my insurance career, we had more than a dozen HMOs competing for business all over the state. Now, between mergers, acquisitions, business failures, and the enormous regulatory and financial barrier to entering the insurance market, we’ve seen this field narrow to just a handful of carriers that are willing to participate.

California regulations

Our legislature has never met a regulation or a mandate they don’t love. Unfortunately, the rest of the country can thank us for initiating many of the provisions in federal law that began as legal requirements here in California, covering areas such as privacy, regulations, domestic partner coverage, and many more. In addition, massive investment capital is needed to comply with California requirements. For example, many hospitals are still struggling to comply with our state specific seismic retrofitting laws.

General practice physician shortage

With huge workload demands, ever-increasing intrusion into the way they manage their practices, high medical malpractice premiums, and the headache of capitation (the low monthly “per head” portion of insurance premium a doctor receives to manage an HMO patients care), many doctors are dropping HMO patients altogether.

Access to specialists

More and more, the California regulations are requiring immediate access to specialists without a referral. These specialists charge higher rates, and if there is unrestricted access to their services, frequency of specialist visits and therefore costs for these claims inevitably increase. PPO and HMO premiums used to be very far apart in costs. However, these rates are getting closer and closer together. As this happens, consumer directed health products will become more and more attractive financially to your clients and can aid in implementing consumer-based solutions that will bend the cost trend down over time.

So, what can we do to lower health care costs in California? Answering that question will take a lot of work and creative thinking beyond what we have seen in the federal health care reform legislation. It may require novel solutions, like focusing on preventive care and employee wellness. But whatever the solutions, they need to be made quickly, because costs are out of control and health insurance premiums are becoming unaffordable here in the Golden State.

Bryce W. Eddy is the senior vice president of employee benefits risk services at Poms & Associates. He can be reached at [email protected] or 800-578-8802.


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