Insurance companies got the Arizona Legislature to pass a 265-page bill; 2 sentences of it cut funds for consumer protection

A bill backed by the insurance industry and rushed through the Arizona Legislature last year will cut a source of funding for the consumer protection agency tasked with policing insurance companies, state officials have warned.

While the Department of Insurance and Financial Institutions routinely inspects insurers’ finances, new legislation means it can no longer pass on all the costs of those inspections to insurance companies, as it has in the past. 

That change in policy may save those companies money but comes even as the department's director describes the department as operating with “bare-bones staffing.”

“If the Department lacks the resources to identify systemic violations in insurer conduct, or problems with insurer financial conditions, all Arizonans suffer the consequences,” Evan G. Daniels, director of the Department of Insurance and Financial Institutions, wrote in a budget request to Gov. Doug Ducey.

The change is just one of several tweaks to state insurance laws approved by the Legislature and signed by the governor in a sprawling 265-page bill last year. The bill’s complexity was the butt of jokes among lawmakers and the only people who spoke in favor of it were insurance industry lobbyists. 

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The bill’s sponsor, Sen. David Livingston, R-Peoria, described the bill to colleagues as continuing with the merger of two state departments and cleaning up existing law.

“This is a bill we’ve been working 18 months on,” he told the Senate Commerce Committee in a February 2020 hearing. “Last year, we passed the bill that consolidated the Department of Insurance, Department of Financial Institutions and auto theft into the new department — DIFI. And this is a continuation bill of putting that into effect ..."

But the bill added two sentences to existing law that limit how the department can fund its work monitoring the finances of insurance companies.

Costs estimated at more than $600K

The work is tedious and often requires the state to hire outside specialists, but it can catch mistakes and other problems inside insurance companies that end up costing consumers.

In the past few years, for example, the department caught a claims processing problem that led to a company erroneously balance billing patients for health care costs. The insurer had to pay back about $2.7 million to consumers who were overcharged and to health care providers, who were underpaid for their services as a result of the error.

The new law limits regulators to collecting the direct costs of examinations, such as the cost of paying examiners contracted by the state and their travel expenses. 

The department has passed on other costs of this oversight to insurers, though, such as the cost of reviewing and targeting examinations. These are classified as indirect expenses.

In the budget request, Daniels said such indirect costs in the next budget year are expected to total about $660,000 and said the agency already has the lowest per capita staffing level of insurance departments around the country.

A spokesperson for the department said that estimate may decrease, as officials could reclassify some indirect expenses as direct expenses. And the fund for examinations has enough money to absorb the change in the next fiscal year, which starts in July. The department does not anticipate a reduction in staff or service connected to examinations. But Daniels suggested the Legislature change state law again and increase certain fees on insurers.

Harvey Rosenfield, founder of the group Consumer Watchdog, cautioned that undercutting funding for such oversight could make such work more reliant on the state budget, putting more in the hands of a political process. But he warned that undercutting the department's sources of funding could cost consumers through higher rates or erroneous bills.

“Every dollar in budget cuts at DIFI means dollars directly out of the public’s pocket,” Rosenfield said.

State Rep. Kelli Butler, D-Paradise Valley, said the department’s request was troubling.

“It’s pretty unusual to have a request like that and have a budget request make such a scathing commentary about their need," she said.

Ben Petersen, a spokesman for Gov. Doug Ducey, said he would not comment on pending legislation, even though there is no bill on the issue.

“What I can tell you is we will be working closely with the department to ensure it meets its statutory duties to Arizonans,” Petersen said.

Livingston's support from industry

Livingston did not respond to a voicemail message or an email with questions about his bill.

The senator has close ties to the insurance industry.

Livingston previously owned a financial services business. About 30% of the donations raised by his reelection campaign and reported so far this year — about $17,000 — have come from insurance companies or lobbyists representing the industry, according to an analysis by The Arizona Republic.

Livingston’s bill sailed through the Senate, and the House of Representatives hurriedly voted on it before taking a long recess amid mounting public health concerns at the start of the COVID-19 pandemic.

Some lawmakers raised alarms, however.

“This is a bill that is coming from insurance companies that want to write how their regulators are regulating them,” Rep. Athena Salman, D-Tempe, said as the chamber voted.

Contact Andrew Oxford at andrew.oxford@arizonarepublic.com or on Twitter @andrewboxford.