Health Insurance

In response to several years of double-digit health insurance premium inflation, California Senate Bill 26 (SB 26) was introduced in 2003 to curtail insurance premium growth. Although SB 26 did not pass out of committee in 2003, proponents of premium regulation are likely to continue to pursue the idea, perhaps through new legislation or a future ballot initiative. This issue brief evaluates why health insurance premiums are rising and examines the potential long-term consequences of regulating premium costs, using examples from other insurance products such as automobile coverage and workers compensation. The findings underscore that if health care costs continue to rise while premiums are frozen, stringent rate regulation could lead to undesired consequences. These include: In the short term, insurers could balance their losses by reducing the quality or quantity of care, or both. Insurers could discourage unhealthy consumers from enrolling in plans, thus increasing the number of uninsured over time. If costs continue to rise and premiums are fixed, insurers may exit the market entirely. Over the longer term, regulation could discourage expensive treatments and technologies, no matter how beneficial, from coming to market. (A desirable related consequence is that premium regulation could motivate the introduction of cost-saving technologies.)