For decades, trial lawyers, the insurance industry, and health-care providers have battled over how to set insurance rates and adjudicate medical-liability claims. In California this year, two ballot measures—Propositions 45 and 46—won’t make that debate any clearer, though if you’re on the insurance commissioner’s payroll or a member of the plaintiffs’ bar, you’ll be happy if they win public approval.

Prop. 45 seeks to limit the power of health insurers and providers to raise rates by subjecting them to stiffer regulatory scrutiny. Its proponents—primarily Insurance Commissioner Dave Jones and Santa Monica-based advocacy group Consumer Watchdog—want health insurers and providers to submit to a prior-approval process similar to one enshrined in 1988 for property and casualty insurers, under which the insurance commissioner may reject insurance rate hikes outright. Prop. 45’s backers maintain that consumers have saved billions of dollars on property and casualty insurance thanks to this regulatory authority, and that a similar arrangement could save them billions more on health care.

Prop. 46, another Consumer Watchdog-backed effort, would raise the state’s current cap on non-economic damages in medical-negligence cases while also requiring doctors to undergo drug testing. The damage-cap adjustment relates to 1975’s Medical Injury Compensation Reform Act (MICRA), which capped “pain and suffering” at $250,000 without any adjustment for inflation. Backers say that the drug testing would curb substance-related medical malpractice claims.

The two measures are unnecessary, to put it mildly. Prop. 45 advocates claim that state health insurance is too expensive and should be more tightly regulated. But if rates are too high, it isn’t for lack of regulation. California is unique among states in its oversight of insurance premiums. The Golden State already has two tiers of health-insurance rate review, which often work in tandem. The first tier has been around since 2010, when the state subjected health insurance rates to a “file-and-use” system. Right now, insurers submit proposed rate changes to the relevant regulator—either the Department of Insurance or the Department of Managed Healthcare. If the regulator determines that the rate is unreasonable, it can ask the insurer or health plan to reduce it. If the insurer fails to comply, its refusal is made public, and the regulator may try to force the issue through a public hearing. Covered California, the state’s Affordable Care Act exchange, serves as the second tier. Unlike the file-and-use system, which relies on public perception to influence insurers, Covered California regulators can veto rate hikes of 10 percent or more.

To an already onerous process, Prop. 45 would add two additional tiers of review. The third tier would give the state insurance commissioner the power to reject health insurance rate hikes, regardless of their amount, just as he can do now with property and casualty insurance rates. Notwithstanding public scrutiny and Covered California’s discretion, Prop. 45’s supporters insist that consumers will suffer unless the state has the power to stop any and all “unreasonable” rates. That’s arguable, at best. Insurers often do reduce their rates at the first hint of public scrutiny. And the Department of Insurance is hardly a neutral arbiter of rate reasonability. The process for deciding whether a rate is reasonable ultimately relies on subjective judgments and political incentives, because the insurance commissioner himself is a career politician. Political incentives almost invariably result in efforts to push for lower rates that ignore market realities.

The fourth and final tier of review would introduce “private intervenors” (that is, attorneys) to the health insurance rate-approval process. The role is modeled again on the property and casualty rate process, in which private intervenors may challenge a proposed insurance rate while the prior-approval process is underway. In theory, intervenors are public-spirited lawyers who forego financial reward for the sake of the public interest. But the role has evolved into a nice practice for professional contrarians—like Ralph Nader protégé and Consumer Watchdog founder Harvey Rosenfield, who has made millions as an intervenor. No other state allows paid intervenors to weigh in during the rate-approval process—one reason why California’s insurers can expect to wait anywhere from one to two years for the state to approve a rate hike.

If Prop. 45 passes, then insurers, facing a four-tier review process, would have to account for the extra time that it will take for rate changes to take effect. They would likely propose rates that lead to as few trips through the rate-approval labyrinth as possible. In practice, this would lead to an unresponsive, more expensive market. California’s auto insurance rates are needlessly high precisely for this reason.

Prop. 46 would have a similarly harmful impact on consumers. The state legislature capped “pain-and-suffering” damages in 1975 to help end an insurance-availability crisis. Windfall damage awards had forced malpractice insurers to raise rates to reflect the new risk, which encouraged doctors to scale back their practices or leave the state. That led legislators to enact a range of tort reforms, most notably the $250,000 cap. Prop. 46’s backers make a superficially reasonable case that after nearly 40 years, the damage cap is too low. But the trouble with non-economic damages is that they don’t comport with objective measurement, much less inflation. Unlike economic damages, which relate to quantifiable losses, “pain-and-suffering” bears no relationship with lost property or wages. As it exists today, the civil-justice system provides remuneration for grievous but measurable losses. On these terms, plaintiffs are being made whole.

Prop. 46 proponents assume that improving the position of plaintiffs will help all Californians. Two problems: first, bigger windfalls for a small collection of plaintiffs would raise the cost of medical care for everyone; second, under the ACA, the cost of those windfalls will be borne directly by consumers or spread among taxpayers, who fund federal health-care insurance subsidies. In either case, the costs will make their way to consumers and undermine access to quality care. Nor will greater windfall awards adjust the behavior of medical providers. State law punishes medical negligence not only through civil penalties but also with administrative and criminal sanctions. The stakes are high already. Negligence persists not because providers are lazy but because achieving favorable outcomes 100 percent of the time is impossible.

The public interest is not the exclusive domain of those who seek government solutions. California’s voters seem to get the point. A Public Policy Institute of California poll released last week shows Prop. 45 and Prop. 46 losing support. In this case, the interests of insurers and medical providers more closely mirror those of the public.


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