Requirement that Carriers Justify Double-Digit Rate Increases a Teachable Moment?

Reasonableness, like a host of other things, can be in the eye of the beholder. Regulating reasonableness, consequently, is nothing like a science. Yet the Patient Protection and Affordable Care Act requires health insurance carriers to disclose their reasons for “unreasonable premium increases.” The Department of Health and Human Services has issued a preliminary version of the regulation aimed at determining how and where this rate increase disclosure will take place.

The draft regulation, which is open to comment and subject to change, requires carriers to publicly disclose any individual or small group rate increases higher than 10 percent. While double-digit increases will not be automatically considered unreasonable, they will trigger a review by state or federal regulators to determine if they’re justified. States will get the first shot at scrutinizing the rate hikes. Only if HHS determines a state lacks the ability to do a thorough actuarial review of premium increases will federal regulators step in. States are eligible for federal grants to bolster their review capabilities and 45 states have taken advantage of the program to date.

Over time this 10 percent threshold could be adjusted on a state-by-state basis according to the National Underwriter. “After 2011, a state-specific threshold would be set for the disclosure of rate increases, using data that reflect each state’s cost trends.”

HHS has the authority to require disclosure of large group rate increases, but chose not to do so.. They’re asking for comments on the advisability of seeking disclosure of large group claims, but according to the National Underwriter, regulators are concerned that doing so would not align with current practices. 43 states, however, already review — and some can deny — rate increases on individual and small group medical insurance coverage. Significantly, neither the regulation nor the PPACA gives HHS the power to deny rate increases. If they determine a premium hike sought by a carrier is unjustified it will post that finding on a government website, but the increase will still be permitted (again, unless a state regulator prevents it). 

The mechanics of the rate review are described in the proposed regulation. To oversimplify, if its desired rate increase is over 10 percent or greater, the carrier will need to notify HHS and post its justification on the insurer’s web site. In evaluating the increase HHS will consider whether:

  1. “the rate increase results in a projected future loss ratio below the Federal medical loss ratio (MLR) standard
  2. “one or more of the assumptions on which the rate increase is based are not supported by substantial evidence.
  3. the choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.”

The timing of the rate increase is determined by state law, so HHS’ review cannot delay implementation of the rate change. What it will do, however, is require disclosure of a great deal of information, bringing an unprecedented amount of transparency to the rate setting process.

Transparency is one of the reasons Consumers Union praises the draft regulation. According to Kansas City InfoZine, its spokesperson, DeAnn Friedholm, cited two benefits the group expects the premium regulations to deliver: “First, it provides a strong incentive for insurers to do a thorough review of their justifications before asking for big rate increases. And second, it will help consumers better understand why their rates are going up and they can decide to look for better plans.”

Which could lead to an interesting result. As the Consumer Union notes, the regulation could “help consumers better understand why their rates are going up .…” And the scrutiny on carriers explanation for increases will be intense. Which makes the posting of the reasons behind the price hikes a powerful  “teachable moment.”

Carriers can use the disclosure to tell a detailed explanation for their actions. For example, in California, hospital rates increased by 150% between 2000 and 2009. Carriers can, and should, get creative in presenting how this medical trend drives premium increases. The question is whether carriers, their actuaries and their attorneys have the skill and willingness to take advantage of this opportunity to present the full story behind skyrocketing insurance costs. Regence Blue Cross Blue Shield provides an example of a meaningful explanation for premium hikes. They even explain the impact of deductible leverage, which is no mean feat.

Regence is providing a general explanation of how pricing works, something other carriers will need to do as well. However, when justifying specific rate increases, Regence and others should go further, naming names. A hospital increases their reimbursement rates by 10%? Name the hospital. A pharmaceutical manufacturer introduces a new drug that costs 20% more than the effective medicine it replaces? Name the drug and the manufacturer.

Carriers could – and should – get even more specific. If the hospital initially sought a 20% increase the insurer should note it’s success in reducing the increase. After all, the beneficiaries of carriers’ successful negotiations with providers are consumers. As I’ve noted previously, health insurers need to do a better job justifying their role in the system. Most health insurance executives would justify their enterprise’s contribution to the system as lowering the cost of health care. Yet with every rate increase they undermine this argument by offering the broad excuse that premiums are rising due to increases in “medical inflation.” Well, now they have the forum and the reason to be specific about what — and who — is driving that inflation.

Who knows, some day regulators may decide to ask medical providers if their charges are reasonable. Until then, there’s no reason carriers can’t ask that question – publicly and loudly. As long as transparency is coming to rate setting, the bright light of disclosure may as well shine on as many parts of the system as possible.

7 thoughts on “Requirement that Carriers Justify Double-Digit Rate Increases a Teachable Moment?

  1. Regarding Double Digit rate hikes:

    Today’s “Rate hike news”: “January 14, 2011 | 12:03 pm
    Defying California’s new insurance commissioner, Blue Shield of California has refused to delay controversial health insurance rate hikes for 60 days that prompted an uproar among customers who are seeing successive increases over the last five months of up to 59%.”

    According to the article, the CA OIC cannot stop such a rate hike unless the carrier is paying out less than a 70% Loss Ratio. Los Angeles Times: http://latimesblogs.latimes.com/money_co/2011/01/blue-shield-of-california-defies-state-insurance-commissioner-on-rate-hikes.html.

    “Insurance Commissioner Dave Jones immediately condemned Blue Shield’s move, saying the company acted on its own without consulting him. Jones discounted Blue Shield’s characterization of its action as “unprecedented,” noting that a new state law requires all insurance rate hikes to undergo scrutiny by outside actuaries.” Fine, only Blue Shield already said, per the article: “The nonprofit San Francisco-based insurer said it would submit its latest increase — effective March 1 and averaging 15% — for review by an outside expert. It pledged to issue refunds to customers if errors are found in its paperwork.”

    Just what is it that Jones wants? Does he not read the news, or filings with his office? Is this simply a new Commissioner who is flexing his muscles and finds them wanting? Should Blue Shield indeed be experiencing a greater than 70% LR, two months with no increase cannot possibly be in the consumers’ best interests. Even a new Insurance Commissioner should have enough smarts to figure that out. Or, is Jones simply a typical politician who is seeking good media reportage?

    Further, not being a Californian other than living here about seven months a year (residence in WA State), and being retired, has Blue Shield done as so many have, and cut the Agents/Brokers commissions? If so, on what are they basing their rate hikes? Color me confused.

  2. The Regence explanation is a good first step but do you believe that they set premium without a consideration for underwriting gain (profit)? Most reports on the subject acknowledge that public and non-profit insurers include a target profit in premium development.

    • AC: Thanks for the comment. And you’re right, there’s more that goes into the setting of a price. Once the actuaries have determined the premium required to cover claims costs they layer on operating expenses, profits (or retained earnings for non-profits), commission costs, taxes, and the like. The largest component of the final premium is, by far, the medical cost-driven component. Going forward, in the individual and small group markets these expenses (along with other expenses that benefit the consumer’s health such as disease management programs) will amount to 80% of the total premium. All the other components will represent 20 cents of every premium dollars. (And yes, these are rough percentages as some expenses (like some federal taxes) aren’t inlcuded, but it’s close enough).

    • Of course profit (or for non-profits) retained earnings are considered. An entity that consistently loses money (and can’t print more) will eventually go out of business. Givent he nature of insurance, where carriers need to be positioned to meet financial responsibilities in good economic times and bad, profits are critical. Interestingly, margins in the health insurance industry are lower than that of most economic sectors. Yet there has to be some.

  3. I am amazed at how well Regence Blue Cross Blue Shield explained the need for premium increases, in the link you provided at http://www.regence.com/transparency/regence-and-reform/how-insurers-set-premium-rates.jsp. Usually a subject that makes one snore, this instead is an enlightening article that is in itself a teachable moment. Alan, your post above was well written. What a grand opportunity lies ahead to inform and to lead. Let’s hope we do it well.

  4. BRAVO ALAN ! You are right on (again) with this piece. If/when carriers begin making the most of the new transparency disclosure laws regarding a carrier’s rate increase, the better off and much informed everyone will be (maybe even our elected officials might wise up also!- NAH…that is expectying too much I guess)

  5. Speaking of teachable moments: Please check out the exchange between Ann and Jim a couple of posts down in “A Few More Unrelated…” There you go folks: There’s the VALUE ADD brought by Agents in this whole process. Try getting THAT from an unlicensed Navigator.

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