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Deregulation’s Flip Side

With Texas' oh-so-light hand regarding insurance, the state's consumers are getting squeezed.
illustration by Phil Foster

Free markets aren’t cheap.

Texas likes to brag about being a low-cost, low-tax, low-regulation state, and private sector folks love to hear it. The state’s tax breaks and bargains on real estate and energy are well known. And Texas’ low cost of living is one reason it ranks among the best states for business.
So why is insurance so expensive? Texans pay more for home, auto, and health coverage—sometimes by a significant amount. Bad drivers, bad weather, and bad habits don’t explain it all.

Try limited regulation. Almost a decade ago, Texas deregulated much of the insurance sector, and consumers have been paying for it ever since. Along with high rates, coverage is often skimpy.

By one measure, the so-called medical loss ratio, Texas lags the rest of the nation by a sizeable amount. Health insurers are now required to spend at least 80 percent of premiums on health care. In the individual market, insurers with 48 percent of enrollees nationwide met that standard in 2010, according to a GAO report. In Texas, insurers with just 7 percent met it.

Most states have to step up their game. But in the rest of the country, almost half the individual-market customers got a fair bang for their buck, at least by that metric. The vast majority of Texans did not.

In the past, the Texas Department of Insurance didn’t bother to review an increase in health insurance premiums unless it topped 50 percent. Under the 2010 federal health law, a 10-percent increase triggers a rate review.

Realize that neither the state nor the feds have the authority to actually reject new rates, even under health reform. But simply reviewing them and disclosing the details—in effect, putting rates under a spotlight—is expected to pressure insurers to keep prices in line.
Texas hasn’t embraced this idea in the past. The insurance department says it spent just $31,000 to review health insurance premiums, according to a 2010 federal grant application. That’s less than 1 percent—.03 percent, to be precise—of its $104 million budget.
“It’s as if we have a regulator who doesn’t believe in regulation,” says Alex Winslow, executive director of Texas Watch, an Austin consumer group that studies insurance issues.

Many states use a heavy hand with insurers, annually reviewing and rejecting premiums. In 30 states, regulators reviewed at least 95 percent of health insurance rate filings in 2010.

Texas prefers to lean on free markets and competition. The theory is that an inviting market will attract many players, and as they fight for business, consumers will benefit. That’s certainly more appealing than building up a bureaucracy to hold endless rate hearings.
But that also requires a transparent marketplace. In Texas, insurers have created so many variables in coverage and pricing that it’s practically impossible to comparison shop without a broker or consultant.

There’s a better way. Texas was a groundbreaker in deregulating electricity, betting that it could create a competitive market that would deliver more choices, more generation, and lower prices.

Regulators established a simple online system to evaluate residential electric plans. The website includes brief summaries, disclosures, and complaint histories. And it’s been improved through the years.

Today, most residents have learned to shop for bargains and talk kilowatts. It’s easy to consistently beat the national average on electricity,
especially in North Texas. That hasn’t happened with insurance.

Residents pay more for homeowners coverage than in any other state. Texas isn’t far from the top on auto insurance, either. In health, family premiums were about 5 percent higher than the U.S. average in 2010, says the Commonwealth Fund. Family deductibles were also higher by $308 a year, 16 percent more than the national norm.

Who knew that California and Hawaii, known for expensive living, have lower health insurance premiums than Texas?

Industry defenders often say that rising medical costs are the real problem in health care, and they’re right. But insurance shouldn’t escape reform.

The new health law hits Texas insurers hard. Under the medical loss ratio rule, they were projected to owe $256 million in rebates, according to the National Association of Insurance Commissioners. Florida, which had more premiums collected, was next, with $204 million. Virginia came in a distant third, with $125 million.

The actual numbers may be lower than the estimates, but Texas appears to be in a league all its own.

“Regulators are supposed to strike a balance between the interests of consumers and industry, but that balance has been lost in Texas,” says Blake Hutson, outreach coordinator for Consumers Union in Austin.

Blue Cross and Blue Shield of Texas, based in Richardson, is the largest carrier, with more than 400,000 members in individual plans. It spent nearly 70 percent of premiums on health costs in 2010. The next five insurers also didn’t meet the 80-percent mark, including Aetna, Golden Rule, Humana, and Cigna.

State regulators requested a waiver on the rule, proposing that the ratio be phased in over three years. The insurance department said that rebates might prompt insurers to leave Texas and destabilize the market.

That was the fear in Maine, where just three insurers offer individual coverage and one threatened to bolt. That state received a waiver.
But Texas has 30 insurance companies selling individual plans, among the most robust markets in the country. And they’re not going anywhere. Texas’ waiver was denied, because the vast majority of insurers—covering 98 percent of enrollees—say they’re staying, rebates or not.

Texas is a lucrative place to do business. And if the health law survives a Supreme Court ruling this summer, millions of additional Texans will be shopping for insurance in 2014.

Businesses might complain about regulation. But for a growth market, they’ll live with it.

Mitchell Schnurman is an award-winning business columnist for the Fort Worth Star-Telegram.