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.

The State’s Role in Health Insurance Rate Increases

The first part of the year is when the cost of most health insurance policies increase. Most medical plans in most places are seeing rate increases far greater than general inflation. This raises legitimate questions about the sustainability of private health insurance pricing. Increasing faster than other prices means health insurance costs represent a larger percentage of overall spending. This, in turn, impacts the competitive position of American firms and the spending power of American families. That’s one of the reasons comprehensive health care reform needs to be high on the nation’s agenda.

In fashioning reforms, it’s important policy makers look at the complete picture. For example, comparing the rate of rising health insurance premiums inflation to general inflation is misleading. What drives health insurance costs is a complex mix of new technologies, an aging population, increased consumer demand and expectations, greater utilization of medical treatment, the cost of prescriptions in this country and a horde of other factors. Those required to defend health insurance rate increases (no one volunteers for the job) usually point to medical care inflation as a more appropriate benchmark than using general inflation. The problem with this defense is that, recently, premiums have increased at rates higher than medical inflation. This discrepancy was pounced upon by some legislators during hearings on health care reform in California this year. Clearly, the lawmakers implied, this is evidence of the industry’s lust for profits. What’s required, they say, is a governmental smack down. (OK, they didn’t actually use the word “smack down,” but premium regulation amounts to the same thing).

Before lawmakers get too carried away, however, they should look at their contribution to rising health insurance costs. Leave aside the costs related to mandated benefits, regulatory compliance and the like. Those are significant, but obvious. What’s less apparent is the government’s use of private insurance to subsidize public programs.

Medicare and Medicaid make up 55-to-60 percent of the average hospital’s revenues according to Richard Umbdenstock, president and chief executive of the American Hospital Association. As reported by the Todelo Blade, Mr. Umbdenstock said this would require providers to shift more costs to private insurance. In other words, when government budgets get tight, they cut back on what they pay doctors and hospitals to provide care to Medicare and Medicaid enrollees. Some of those providers reduce the number of such patients they’re willing to see — or stop serving them all together. That’s bad enough.

Others, however, shift the cost to those with private coverage. With more than half their income generated by government programs, it means a disproportionate amount of increase on private plans is required to make up for public cutbacks. If 60 percent of a hospital’s income flows from public programs, a 10 percent reduction in reimbursement rates requires increasing charges to private insurers by 15 percent. And that’s before increases based on medical cost inflation, general inflation or any other factors. It’s a rate increase entirely generated by governmental action.

This system actually works well for politicians. They get to cut government spending by undercompensating medical providers treating public program patients and they get to complain about “indefensible” rate increases by greedy private health plans. In other words, they get to pitch the problem, avoid having to catch it, and they can criticize the people that do.

Politicians who want to control both sides of the equation — cut back on public program funding and regulate private health insurance premiums — should be careful about what they wish for. Their own contribution to skyrocketing medical insurance premiums will be much more obvious. They’ll have to catch the problems they create  and they’ll be on the receiving end of the criticism, too.