Today the California Assembly Health Committee will hold a hearing on a bill that would allow state regulators to reject health insurance rate increases deemed excessive or discriminatory. This hearing will come just six days after the first board meeting of the California Health Benefit Exchange. Many hope that the Exchange will take the lead in holding insurance rate increases down through actively negotiating with insurers. Can active negotiation work in tandem with rate regulation?

Mike Russo, health care advocate and staff attorney for CALPIRG, which is a sponsor of the rate regulation bill, believes it can. In an issue brief, he writes that active purchasing and rate regulation, “combine and complement each other to deliver even better value for consumers.” He further points out that “the large majority of Californians will not get their coverage through the Exchange, meaning the Exchange’s negotiating power will not help them.”

Jon Kingsdale, who ran the insurance exchange for the state of Massachusetts offers note of caution. He uses the analogy of running a supermarket “It’s as if Safeway were simultaneously capping what Del Monte could charge anyone for pineapples, and also trying to work with Del Monte to present, promote and sell their produce on its shelves at the best rates possible.”

There may be tension, therefore, to the extent that there is confusion over the different roles of the state. Most of the plans offered through the Exchange will be regulated not by the independently elected Insurance Commissioner but by Department of Managed Health Care. The Director of this Department reports to the Governor whose Secretary of Health and Human Services also serves on the Exchange Board.

As the Administration sorts through its priorities in regard to insurance sale, on the one hand, and regulation, on the other, it will want to learn from the past including the state’s experience with its ultimately unsuccessful small group purchasing pool, PacAdvantage. This experience suggests first that setting up an exchange is a difficult business and second that it is, in fact, a business. It’s a very different undertaking than traditional government activities such as providing a social safety net or regulating private industry, and it’s worth thinking very seriously about how it intersects with them.

There are many unanswered questions in this regard. If the state negotiates a rate with insurers, how could it deem that rate to be unfair? But if the exchange is effectively exempt from rate regulation, how is that fair to the rest of the market? The plain truth of the matter is that no one quite understands exactly how all of the new pieces created by federal reform will fit together, what kind of incentives they will create, and what kind of outcomes we can expect. All we know for certain is that the new exchanges will be operating within a vastly different legal and regulatory structure than past exchanges.

For example, Russo’s piece states that the Exchange’s negotiating power will not help people outside of this marketplace, but it’s not entirely clear if this is true. In order for a product to be offered through the Exchange, it must be designated as a “qualified health plan.” For a plan to be “qualified,” the health insurer must agree “to charge the same premium rate … without regard to whether the plan is offered through an Exchange or … offered directly from the issuer or through an agent.” So to the extent that the Exchange is able to negotiate a better price for a plan that is available in the wider market, this price will be lower for everyone, not just Exchange enrollees. This is one of the many seemly subtle nuances of the law that may nevertheless have far-reaching implications.

Conversations about healthcare reform do not tend to be ones that are heavy on subtle nuance. The success of this endeavor, though, is far too important for millions of Californians for us to give these issues the attention they deserve. Since the California Health Benefit Exchange is the linchpin of federal reform, legislators should think very carefully before taking any actions, such as passing a rate regulation bill, that might undermine its role or otherwise complicate its activities.

Micah Weinberg, PhD is a Senior Research Fellow, Health Policy Program, with the New America Foundation.