Why Are Health Insurance Rates in California So High?

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?