Proposition 45 on the Nov. 4 ballot would have given the California insurance commissioner the power to limit health-insurance rate increases. It lost.

Opponents, including officials at Covered California, assured voters adequate price controls would be negotiated by the officials running the exchange — without Prop. 45. Covered CA is the state’s health insurance exchange set up under the federal Affordable Care Act, or Obamacare.

But for the state’s small businesses and their employees, those words have begun to ring hollow. As the new year rings in, some 64,000 Californians will see rate increases averaging more than 10 percent — in some cases, nearly 20 percent, according to the state Department of Insurance.

As the Los Angeles Times reported, that nets out to $23.5 million in “excessive” premiums for small business employers and employees.

Broken promises

Party politics only added to the controversy. California’s two Democratic U.S. senators, Barbara Boxer and Dianne Feinstein, threw their support behind Prop. 45. But other Democrats opposed it, instead backing Obamacare and the Obama administration figures brought on to ensure Covered CA succeeded in enrolling big numbers (unlike many other state exchanges).

Republicans, meanwhile, saw Prop. 45 as yet another effort to expand government regulation over not just Covered CA, but private insurance concerns.

State Sen. Ted Gaines, R-Roseville, seeking to unseat incumbent Insurance Commissioner Dave Jones, lambasted him for standing with Boxer and Feinstein. But although voters dumped Prop. 45, they also stuck with Jones.

Adamant that its increases are properly calibrated, “Aetna said its rate increase was justified based on the expected medical costs for employers,” the Times reported. Jones’ office had tried, but failed, to limit Aetna’s rate increases to  just 2.6 percent on the 64,000-strong small business group.

A domino effect

For Jones, Aetna’s calculations led to excessive rate hikes because the company misjudged the effect of Obamacare and Covered CA on its risk pools. Although other factors came into play, Jones’ office determined Aetna had wrongly assumed “that customers enrolled in new plans complying with the federal health care overhaul are less healthy than those in older policies,” according to the Sacramento Bee.

What’s more, Jones implied, Aetna bumped up its increases once it looked likely Prop. 45 would go down to defeat.

Pushing back against that interpretation, Aetna vowed through a spokesperson that Jones had it all wrong. Cynthia Michener, the Bee reported, “said that though rate increases are never easy, the rates are based on actuarially sound data and a reasonable projection of future cost. She said the firm Milliman provided Aetna with an independent actuarial analysis and certified the insurer’s assumptions and rates as reasonable.”

Previously, Aetna CEO Mark Bertolini had spoken out against the ACA, warning it would result in higher premiums.

Distortions

From a bird’s-eye view, however, some analysts have pointed out that Aetna’s rate increases are a rational result of the market distortions created by the ACA’s regulatory framework. As Scott Gottlieb argued at Forbes, “Obamacare was designed with the goal of commoditizing health insurance. The belief was that competition between plans would turn largely on premiums and cost sharing. This was seen as a way to hold down prices.”

What happened instead, Gottlieb explained, was that pushing down on competition in the areas of networks and care delivery discouraged competition between “different benefit packages and plan designs.”

In other words, the big, established coverage providers discovered they could create many variations on very similar benefit packages.

In a free market for health care, different plans would differ in their benefit packages as well — giving small business owners, for instance, greater options around not just scope of coverage but cost of coverage.

Instead, the ACA has dramatically narrowed their available coverage, leaving business owners with little alternative to Aetna’s hiked rates.

Prop. 1, water bonds. Winning 68-32. The $7.5 billion in water bonds will cost $15 billion to pay off. For that, only $2.5 billion will go to dams and reservoirs to help alleviate future droughts. It’s a typical California ripoff, with special interests getting the lion’s share of the money.

Prop. 2, rainy day budget fund. Winning 71-29. The Legislature always has figured out ways to grab the money in previous rainy-day funds guaranteed by initiatives. We’ll see if that happens again.

Prop. 45, giving the insurance commissioner authority over medical insurance rates. Losing, 61-39. Massive ads against it doomed the initiative.

Prop. 46, drug testing doctors. Losing 68-32. A silly regulation that would have driven doctors from their profession faster than Obamacare is.

Prop. 47, reducing penalties, mainly for drug use. Winning, 57-43. A big coalition backed it. A rare defeat for law-enforcement unions.

Prop. 48, Indian gaming compact. Losing, 63-37.

On Proposition 45, some Democrats are feeling as if they got a transfusion of the wrong blood type. The initiative would give the state insurance commissioner the power to approve changes in health-insurance policies, including those by Covered California, this state’s implementation of Obamacare.

Normally Democrats back more regulation, and plenty support Prop. 45. But it would affect not only private health insurance companies, but Covered California as well. Yet Covered California’s smooth success, unimpeded by state second opinions, is crucial to Obamacare’s national success.

Few have admitted it, but the roots of the conflict ultimately stretched back to the very nature of Covered California’s successful establishment. At a time when other state exchanges, such as Oregon’s, were failing in a way that imperiled Obamacare’s implementation, the success of Covered California had become all-important. Without enough signups, insurers whose products were mandated for purchase under Obamacare couldn’t deliver rates the public would accept.

As a result, Covered California became a crash effort to tap California’s substantial population for exchange signups. Enrollees without adequate paperwork or identification were provisionally allowed into the program. No-bid contracts went out to close associates of Covered California officials, who knew how to leap regulatory hurdles quietly and quickly. Once the publishable number of signups rose high enough, and Obamacare stabilized, the administrative cleanup could begin. A central part of that effort would include revisiting rates negotiated with insurers.

A political curveball

But if passed, Prop. 45 would scramble such planning. Incumbent Insurance Commissioner Dave Jones holds a strong interest in supporting Prop. 45, which would give him new powers if he’s re-elected. He’s running against Republican Ted Gaines, a state senator from Roseville. Gaines opposes Prop. 45 and has challenged Jones to a debate on it.

Embracing Prop. 45 was an apparently safe bet for Jones, who had powerful Democrats in his corner, including both of California’s Democratic U.S. senators, Dianne Feinstein and Barbara Boxer.

Insurance companies, to no one’s surprise, were opposed. The dynamic had all the makings of a predictable election-season matchup if there had been no Covered California.

The current train wreck could have been predicted by observers thinking a few steps ahead. The unsettled scope of Covered California’s regulatory authority teed up a classic bureaucratic turf war of the kind routinely on display in Washington, D.C.

For Covered California officials, it was essential to ensure  they could pursue their organization’s agenda unimpeded. That meant establishing direct negotiations with insurance companies themselves — without interference by state-level bureaucrats.

Adding to the administrative jockeying were the implications of the state health exchange itself. Though nominally a market in health care merely established by California through federal law, the exchange inherently politicized the cost of health insurance.

In a free market, for insurance, rates are set by company calculations. In a state-supervised exchange, by contrast, rates become subject to price manipulation based on the imperatives of keeping the exchange economically viable and politically palatable.

Shifting battle lines

From the outset, Prop. 45 threatened to complicate the ability of Covered California officials to independently pursue those imperatives. As the Sacramento Bee reported this summer, at least some influential exchange officials explicitly argued against Prop. 45 on the basis of politics. Diana Dooley, an HHS official who also chairs the board of Covered California, warned against the measure’s provision allowing challenges to rates Covered California negotiated.

For Dooley and her allies, the nightmare scenario involved activist conservatives using the challenge system to undermine trust in Covered California and reduce its efficacy.

But objections to rate-setting without adequate insurance commission oversight have been raised most frequently by Consumer Watchdog, the frequent opponent of large corporations that sponsored Prop. 45 to begin with. Because Covered California officials failed to imagine that anti-corporate sentiment would turn Californians against their plans, they walked into an election-year morass.

The predicament has left opponents of Prop. 45 falling back on a familiar strategy: advocating for additional time before Obamacare is judged wanting. In an editorial dismissing Prop. 45, the Los Angeles Times argued, “Covered California should be given the chance to fulfill its mission to the best of its ability before the state adds another layer of complexity to an already complex process.”

For his part, Jones is remaining adamant in favoring an initiative that would increase his office’s powers. He wrote on his Facebook page, “Vote YES on Prop 45 and make health insurers justify their rates!”

But the split within his own party, combined with plentiful insurance-company ads against the measure, could thwart his wishes.

Officials at the Covered California insurance exchange, the state’s implementation of Obamacare, worry passage of Prop. 45 could damage its operations, potentially affecting insurance coverage for millions of Californians. But the board has chosen not to notify California voters of their concerns by formally opposing Prop. 45.

“The initiative could seriously undermine the work that we have underway, our operations, and could compromise the terrific movement and progress that we are making with implementing health reform in California,” said Covered California Board Member Kimberley Belshé at the board’s recent meeting (webcast here).

Board Member Diana Dooley agreed. “I personally have very serious concerns about the interaction of the plain language of this initiative and the work that we’ve invested in making the Affordable Care Act real in California and to some considerable degree somewhat successful,” she said.

Those concerns were confirmed in a report by Executive Director Peter Lee, which found, “Proposition 45 could have a significant detrimental impact on Covered California’s operations….”

Prop. 45

Known as the Insurance Rate Public Justification and Accountability Act, Prop. 45 would require health insurance rates to be approved by the state insurance commissioner, similar to the car insurance rate approval mandated by Proposition 103 in 1988.

Lee’s Prop. 45 analysis cited several concerns:

• “Covered California’s role as an active [insurance] purchaser could be significantly undermined if health plans negotiating with Covered California are reluctant to consider or negotiate on factors other than price because of uncertainty about the subsequent price that will be approved (or ordered) by CDI [California Department of Insurance].
• “If for any reason a new rate were not approved in time for open enrollment, plans would ‘default’ to the old rate for the entire next year.
• “Current timelines under Proposition 103 [if applied to medical care under Prop. 45] would provide significant disruption to the offering of plans for the annual open enrollment.
• “One risk that Covered California needs to be concerned about is the potential of health plans withdrawing in advance of or during the rate regulation process. To the extent a mandatory intervenor hearing process is unresolved in time to meet the open enrollment deadline, a plan’s proposed rate could not go forward.
• “Almost 90% of Covered California’s consumers receive federal subsidies to reduce their net premiums…. [I]f the rate change sets a new ‘second lowest silver’ plan, some consumers could see their costs increase due to the adjustment of the prices used for the tax credit calculation and the potential reduction of the purchasing power of the tax credits.”

Warn voters?

The Covered California board members could have laid out their concerns in a resolution opposing Prop. 45 to help voters make a better informed decision ahead of the Nov. 4 election. But they unanimously declined to do so.

“I think the beauty and the right kind of influence of this board is to remain as apolitical as possible,” said Board Member Robert Ross. “I’m philosophically opposed to taking any formal position on this ballot measure or any other. I think there’s plenty of politics to go around. Let it go on and let’s try to keep it out of the deliberations of this body.”

The board’s decision to remain neutral on Prop. 45 was welcomed by more than a dozen Prop. 45 supporters who spoke at the meeting.

“People will differ in their analysis of whether Prop. 45 will make the world better for consumers or not better,” said Betsy Imholz, representing Consumers Union. “But one thing is indisputable, that the insurance industry is unanimously and vociferously opposed to it. Were you to align with that position, I think it would create a bad public image.

“And were it to pass, I think the public would be watching closely and questioning your implementation of the act. You don’t need that. None of us needs that. We just want to move forward with the very successful work that you’ve been doing over the past several years.”

Elizabeth Pataki, a retired intensive care nurse representing the California Alliance for Retired Americans, agreed.

“Since Covered California is prohibited under California and federal law from spending taxpayer money to campaign for the ballot initiatives, and since you negotiate with the powerful health care industry to ensure Californians must buy health care and have access to that care, as such it’s very important that you avoid taking sides and getting involved in a political fight with consumer advocates on one side and the health care industry on the other,” she said.

“We need Proposition 45 because there have been 185 percent increases in rates, which have caused severe difficulties. Those severe difficulties include working people and retired people going bankrupt. Proposition 45 will apply the same rates as car coverage. It does not undermine the Affordable Care Act. And it’s public, it’s transparent, it’s open. The public can see what’s happening.”

Concerns

Only one person argued that the board should make its concerns public about Prop. 45.

“We have substantial experience with Prop. 103,” said Steve Young, representing the Independent Insurance Agents and Brokers of California. “From our position, Prop. 45 was a sham. What it is represented to be is not in fact what it would be. We believe and are sure that there is no empirical evidence to suggest that the Prop. 103 rating law, or especially the public intervention process, has done anything to lower insurance costs in property casualty insurance.

“Our view is Covered California itself already has done and will continue to do more to temper and lower insurance costs for California consumers than Prop. 45 ever could. So our view, while we certainly understand your position, is that it would be appropriate for you to call a pig a pig, and take a position against Prop. 45.”

Although the Covered California board has sought to stay above the political fray, it has found itself mired in it anyway.  Consumer Watchdog, which is leading the campaign for Prop. 45, on Monday sent a letter to Attorney General Kamala Harris seeking an investigation of the agency’s no-bid contracts and suggesting Covered California is in collusion with insurance companies against Prop. 45:

“Covered California has refused for months to release information requested by Consumer Watchdog under the Public Records Act concerning the agency’s communications with insurance industry executives about Prop. 45 …. Californians deserve to know the truth about hundreds of millions of dollars in no-bid contracts and industry influence at Covered California before they vote November 4th.”

Dooley responded to criticism at the September Covered California meeting. “I … am deeply troubled by the politicization of the work that we’ve done and the suggestions that necessarily come up in a political campaign,” she said. “And the characterizations that have been made and may continue to be made that we are not a sufficient steward of consumers.

“I kind of take personal offense at that because I’m here because of my consumer commitment. And I think we have established a reputation of openness and evidence of consumer protection.”

Covered CA problems

In other action at the meeting, Lee told the board that many Californians who called Covered California in the previous month were put on hold for as long as 40 minutes while those whose citizenship was in question were moved to the front of the call line.

The number of suspected illegal residents, who were in danger of losing their insurance eligibility, had grown to 148,000. Prioritizing their cases reduced that to just 10,474 clients whose legal residency is still in question, according to a press release.

Lee told the board that, although the law requires illegal residents be dropped from coverage after 90 days, Covered California has extended their coverage “well beyond that.”

Thanks to the cumbersome and convoluted nature of the process, state regulators are grappling with bad provider lists, limited plan acceptance and a host of complaints from Californians caught in the mix. Patients, doctors and even whole hospitals have fallen into confusion over whether they are “in” with a particular carrier’s health care plan.

According to the Sacramento Bee, the impact of the regulatory bewilderment is widespread. Some customers haven’t received ID cards or enrollment packets. Some insurers, meanwhile, have found themselves under new legal scrutiny. California state law puts the onus on them to make sure they accurately list doctors participating in plans — and to have enough providers on those lists to meet demand.

Behind the numbers

Part of the chaos has been caused by a spike in new customers. A new Kaiser Family Foundation survey indicates that some 3.4 million adults gained coverage in California over the last year. But most surveyed who did gain coverage had to rely on an “outreach worker” or “enrollment agent” capable of navigating customers through the tangled web of rules, regulations and forms. And about half of the increase in total covered came through California’s expansion of Medicaid, not through the Covered California exchange set up under Obamacare.

What’s more, the rise in insured has come with an even more startling increase in health care premiums. Critics of the Obamacare legislation had warned premiums would skyrocket. Advocates of the health care law, on the other hand, conceded that some increases were necessary to pay for the costs of wider coverage.

As John Sexton put it, “Obamacare intentionally created higher premiums for younger people and those not eligible for subsidies on the individual market. Those increases were not only predicted, they were considered a feature, a way to offset the costs of expanding insurance to millions of lower income people who did not have coverage.”

Regulatory struggles

But as Sexton also reports that the leap in premiums — which have risen as much as 88 percent — has led California Insurance Commissioner Dave Jones to throw his support behind a new initiative that would allow state regulators to control increases in insurance rates. The power of Jones’ office currently allows him to deem increases “excessive,” but not to halt them.

Proposition 45, which will appear on November’s ballot, is opposed by insurers, who have put some $25 million dollars into an effort to turn public opinion against the measure.

The politics of Prop. 45 are unusual: U.S. Sens. Dianne Feinstein and Barbara Boxer, both Democrats, support the initiative. But Covered California officials worry that its increased role for regulators would complicate the rate-setting process and undercut their own authority to negotiate rates with insurers.

One such critic is Diana Dooley, the Health and Human Services Agency secretary who chairs the exchange board. Dooley is officially neutral on Prop. 45, but has argued that Covered California should have an opportunity to negotiate premiums downward without putting the “advantages” of Obamacare at risk.

As the Bee reports, Dooley perceives at least some of those advantages to be political, while “the ‘intervention’ process works for other types of insurance, it could encourage critics of the controversial law to challenge rates to the detriment of the exchange.”

She told the Bee “there are people who are opposed to Obamacare without regard to any of the facts, and anybody could throw a monkey wrench in this. That gives me quite a bit of pause.”

Jones, however, identified a more fundamental policy problem created by the politics of Obamacare. “We’ve given them a legal monopoly,” he told the Bee of the insurance companies. “Now, by law, everyone has to buy their product.”

For Obamacare advocates like New York Times columnist Paul Krugman, the outsized role of Medicaid expansion in California’s increased coverage amounts to “stealth single payer.”

Prop. 45 indicates that Obamacare may drift toward single payer in another way as well. Economics strongly suggest that if regulators mandate a monopoly for a handful of large firms, prices will rise significantly. Such a substantial government intervention in the market could well require a second, more serious round of government intervention to cap such increases.

According to R Street, “Such a system already exists in the property and casualty market as a result of the infamous and lamentable Proposition 103.”

The endorsement makes sense. If it passed, Prop. 14 will chase some health-insurance companies out of California because the price controls will make them unable to make a profit. That will cause many people to rush into Obamacare/Covered California, making it finally seem to be a “success.”

And the state will take one more step toward the single-payer, socialized medicine, Soviet-North Korean-style scheme Democrats have backed for decades.