Senator George Runner
Serving the 17th District which incorporates portions of the Los Angeles, San Bernardino, Ventura and Kern counties.

As health insurance and coverage costs increase, some health care lobbyists are calling for more regulation. They claim insurance companies and health plans waste too much money on administrative costs and take too much profit, while not spending enough on patient care. The facts suggest otherwise.

Earlier this session, Assemblyman Dave Jones (D-Sacramento) introduced Assembly Bill 1554, which would regulate health insurance rates. Jones argued, “...health insurance is unaffordable for far too many Californians, and that, without rate relief , more Californians will become uninsured or underinsured... health insurance premium increases are soaring above the rate increases for wages, inflation and medical costs... these excess profits, as well as marketing costs, high executive salaries, excess reserves, and investment income, could be used to provide full coverage to Californians or to reduce rates... rate regulation will not only save money for those who have insurance, but will make it more likely that uninsured Californians will be able to afford coverage.” (AB 1554 was defeated by a single vote in the Senate Health Committee.)

However, that argument ignores the underlying reasons for the costs. Claims that health insurance is expensive only because of overhead and profiteering are useful to rouse anger but are not accurate. Studies have repeatedly demonstrated that medical costs, not administrative costs or profits, drive up the price of health insurance.

For example, a 2004 study by RAND Health found that while HMO premiums increased about 18% from 1997 to 2000, profits remained flat. The study indicated that the increased premiums were used to pay higher claims for medical care and further stated that the chief causes of rising medical costs included “... higher pharmaceutical expenses, technological changes in medical procedures and products, tight labor markets for nurses and physicians, hospital consolidation and market power, expansion of insurance coverage and mandated benefits, and changes in the population’s age structure.”

According to Yahoo’s industry snapshots, the year-over-year net profit margin in the entire publicly-traded health care sector is 10.91%. Net profit margins for health insurance companies over the same period are 5%, or less than half of the industry sector average. In other words, health insurers under-perform the health industry average for net profit margins.

In fact, a 2006 PricewaterhouseCoopers study found that health care spending consists of:

physician services – 24%
outpatient costs – 22%
inpatient hospital costs – 18%
prescription drugs – 16%
other medical services – 6%
consumer services, product support and marketing – 5%
health plan profits – just 3%

Legislation requiring government approval of health insurance premiums fail to address the underlying costs of medical care. Such bills misrepresent the facts of health care costs in California. Worse yet, as the 2004 RAND study stated, “Rate regulation in other insurance markets has resulted in less access to coverage for high-risk individuals, fewer insurers participating in the market, and less incentive for individuals to control costs. These undesirable effects are likely to occur in the health insurance market if health care costs continue to rise while premiums are controlled.” Clearly, these regulations will not help Californians.