Rate Regulation Under California's Prop 216: Costs Without Benefits

This November, California voters will decide whether to adopt either Proposition 216 or its close cousin, Proposition 214. Both initiatives impose significant and, in many ways, perverse regulatory constraints on both health care providers and payors. These initiatives might well be titled the "Health Care Inefficiency Promotion Acts of 1996." Prop 216 taxes hospitals for eliminating patient beds (even though, on average, half the beds in the state went unused in 1994).

Prop 214 prohibits the firing, layoff or demotion of a doctor, nurse or other certified health care provider without "just cause." Prop 216 taxes health care mergers, even mergers which would increase efficiency and reduce costs to health care consumers. Any law which restricts the ability of a health care facility to adjust staffing levels to meet lower demand will reduce efficiency and increases costs.

Overlooked Concerns

In light of these provisions, it is not surprising that little of the debate over Prop 214 and Prop 216 has focused on the provisions of Prop 216 dealing with regulation of health care charges and health insurance premiums. These overlooked sections have the potential to force a drastic change in the way health insurance premiums and hospital and physican charges are set.

Prop 216 prohibits HMO's and health insurers from increasing premiums or co-payments and deductibles without previously filing a statement with the Department of Health Services certifying that the increases are necessary and disclosing the additional revenue expected to be generated by the rate increase. The filing, which would be public records, must also identify the use to which the additional revenue will be put and the total revenue and total expenses for each of the previous three years.

Prop 216 also provides that hospitals, clinics and physician groups with more than 25 employees may not increase charges unless they file the same type of information required of the HMO's and health insurers. Virtually every provider of medical services -- from physician groups to hospitals -- with more than 25 employees will be required to certify the need for any rate change and provide supporting data. Even in its least onerous form, the cost of compiling and filing the requested data is not trivial. For small health care providers, the cost of such filings could be burdensome.

Prop 216 provides the Department of Health Services with sufficient authority to established a full blown prior approval rate regulation system of the type imposed on property/casualty insurers by Prop 103. Moreover, Prop 216 authorizes health care consumers not only to intervene in any proceeding arising under the initiative, but also to go directly to court to enforce any provision of initiative on behalf of the public. Thus, if consumer groups believe that the Department of Health Services has not implemented the rate review provisions of Prop 216 aggressively, they can seek a court mandated regulatory regime.

Questionable Benefits

It is difficult to see how the rate provisions of Prop 216 will produce any benefit to health consumers. The existing health insurance market is very price competitive. HMO's and insurers compete vigorously for subscribers and policyholders. There is no evidence that the existing market has led to excessive premiums. Nor is there any evidence that HMO's and insurers are not effective purchasers of health services. Indeed, the impact of cost containment measures on physician income and hospital revenues is well documented.

Doctors are making a lot less money and some hospitals are being forced into bankruptcy due to fierce cost cutting by HMO's. Hefty and well publicized profits earned by HMO's explain, in large part, why Prop 216 is on the ballot this year. However, these profit do not appear to come from excessive premiums charged health care consumers. Rather, they have been earned largely at the expense of health care providers.

Rate regulation of HMO's, insurers and health care providers simply does not address the problems in the health care market. Indeed, if enacted, Prop 216 is likely to increase the very administrative costs it is intended to limit. Ironically, the more aggressively the rate filing provisions are implemented, the greater the increase in administrative costs and, ultimately, cost to health care consumers.

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