This Ballot Initiative on Health Care Is So Bureaucratic, It Even Scares Obamacare Supporters

California's Proposition 45 would make health care even more convoluted.

SACRAMENTO — In the well-known scene in Casablanca, Captain Renault orders Rick to shut down his gin joint. "I'm shocked, shocked to find that gambling is going on in here!" he said, pausing long enough to grab his winnings. That scene always reminds me of our government. We know how it works, yet many of us still act surprised there's gambling in the Capitol casino.

The latest "shocked" moment came when the Associated Press (AP) reported earlier this week on some controversial contracts issued by Covered California — the new Obamacare-inspired insurance exchange that mainly sells subsidized health plans to people who can't otherwise get coverage.

"California's health insurance exchange has awarded $184 million in contracts without the competitive bidding and oversight that is standard practice across state government, including deals that sent millions of dollars to a firm whose employees have long-standing ties to the agencies executive director," wrote AP's Michael Blood.

This looks bad, especially as Obamacare supporters fight back an initiative (Proposition 45) on the November ballot that would give the state's insurance commissioner the power to approve or reject health-care rate hikes — the same power he has with most other types of insurance.

"The contracts reflect a troubling practice at Covered California," wrote Consumer Watchdog President Jamie Court, in a letter to the attorney general. "An independent investigation by your agency is warranted to determine … whether consultants have inappropriately used their position with the government agency to advance the interests of former and current insurance industry employers."

Calls for an audit make sense, perhaps, but Consumer Watchdog is the key backer of the November initiative. The group has made millions of dollars challenging insurance rate hikes under the "intervenor" process codified in Proposition 103, the 1988 initiative that regulates auto, home and casualty insurance and is the model for the new ballot measure.

Under this system, intervenors are paid to challenge rate changes proposed by insurance companies, in a process that can take many months to resolve. Obamacare supporters are rightly concerned that if Proposition 45 passes, it will bollix up the fledgling health exchange's ability to negotiate rates.

Polls last month put the proposition ahead, but with support falling. This black eye for Covered California has reignited interest in the race. Covered California officials say the no-bid contracts are reasonable, given few firms have the expertise in creating exchanges and they were in a time crunch to meet deadlines. One of these no-bid recipients helped build the former Healthy Families system, which is similar to Covered California.

The real battle, as the Los Angeles Times' Jon Healy explained recently, is between Covered California supporters who claim the new exchange is lowering premiums, and Proposition 45 supporters who claim that "insurers are gouging their customers" so Californians need more protection. The no-bid issue works in the favor of the latter argument in this fight over election "optics."

Nobel-winning economist George Stigler wrote about "regulatory capture," in which regulated industries often exert excessive influence in the agencies that regulate them.

It certainly applies here, but it seems ironic for Consumer Watchdog to complain about cozy relationships between the insurance industry and the new insurance exchange given its cozy relationship with the current commissioner, Dave Jones. It seems easier for interest groups to control one official rather than an entire insurance exchange. "I don't buy that — not when that official is accountable to the voters every four years," Court told me. I'm skeptical that voters offer enough of a check.

No-bid contracts are problematic, but a bigger problem may be the lack of a truly competitive insurance market in California's highly regulated and politicized insurance industry. I'm no fan of Obamacare, but consider what will happen if California voters add to this convoluted system yet another set of regulations and yet another level of power to one official.

Instead of feigning shock at officials handing out no-bid contracts, Californians ought to be truly shocked that any of these systems work at all.