The “Unreasonable” Premium Increase Rule

HHS has now released its final set of draft regulations for provisions of the Affordable Care Act scheduled to go into effect early in 2011. This last regulatory publication—actually a “notice of proposed rulemaking” inviting comments prior to implementation—provides proposed rules for disclosure and justification of “unreasonable” premium increases.

The proposed “confess and explain” regulation requires insurers to publicly disclose rate increases in the individual or small group markets of ten percent or more in 2011, or above individual state-by-state thresholds starting in 2012. The thresholds will be set by HHS, presumably in conjunction with the states.

Although the proposed rules require review either by HHS or, if a state has an “effective rate review system,” by the state, no authority is provided for the rejection or modification of rate increases. Apparently, the Congressional drafters of the ACA language—which the proposed rule generally follows—felt that the threat of a premium increase being called unreasonable would have an adequate sentinel effect. However, insurers who show a “pattern or practice of excessive or unjustified premium increases” can also be excluded from insurance exchange participation.

In summary, the process proposed by HHS would require insurers requesting premium increases exceeding the thresholds to disclose their justification either to the appropriate state regulator or—if HHS has determined that the state does not have an adequate rate review procedure—to HHS itself. If the state (or HHS) then decides that the increase is excessive or unjustified, it is expected to make this decision public, with HHS then posting the determination on its website. The hope, obviously, is that an insurer will want to avoid such negative publicity and will trim or abandon the increase.

Reform advocate Timothy Jost has posted a lengthy critique of the HHS proposal in the Health Affairs Blog. He expresses concern that the rule would not apply to the large group market, that by tying the proposed rule to so-called “products” individual groups could face increases much higher than the nominal thresholds, and that the information that insurers would be required to disclose would be too limited (and could be further limited by recourse to protestations of trade secrets).

In a comment on Jost’s critique, Jeff Goldsmith questions the capability of HHS in evaluating a requested increase—and notes the potentially substantial effort involved—given that it might be driven by risk selection or the actions of monopolistic providers or other factors that may be difficult to determine. Goldsmith comments: “it’s a charter for arbitrary ‘jawboning’ of the industry, not an explicit charter for actually regulating it.”

HHS provides some statistics that help provide an estimate of the amount of effort that insurers, states, and HHS may incur as a result of the proposed rule. Based on HHS’ numbers, it seems likely that somewhere between 500 and 1000 premium increases a year could be subject to the disclosure and review processes, with the number gradually increasing as groups lose their grandfathered status, and with each review requiring hundreds or thousands of man-hours. How many of these reviews might result in insurers trimming their increases is anyone’s guess, but Goldsmith’s expressed preference for market competition over HHS rules may well be justified.

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7 replies »

  1. The greatest driver of premium increases is a worsening risk pool.
    If young healthy people drop out of insurance, and older
    unhealthy people stay on, then premiums must go up or
    the insurer will go broke.
    I have been in the insurance field for many years.
    The largest increases I ever saw were from a co-op non-profit plan that serviced rural schoolteachers.
    There were no stockholders, no highly paid CEO’s,
    no agents, no coverage recissions, and not even any
    high priced hospitals in the area.
    There were just a lot of subscribers in their fifties and sixties.
    The only solution is a risk adjustment system, which
    Germany has, Switzerland has, Holland has, and even Medicare Advantage has.
    Retropective Risk adjustment in the American employer market would be a massive undertaking, both in dollars and research time. Short of that, the only solution is a subsidized public option, which of course is a light version of Medicare for All.
    Bob Hertz
    Director, The Health Care Crusade

  2. I suggest that Barry open the Annual Reports for Aetna, Wellpoint, UHC, and Coventry for the past seven years. Their Gross Profit margins on the insured commercial lines have ranged between 7% and 12%–a far cry from the 3% to 4% that the industry consistently touts.

  3. Right on, Barry. Not just fraud and abuse, but the perfectly legal but distinctly unethical practice of physician self referral. Add to your list: attackinf anti-competitive practices in the provider space, including the wave of hospital mergers and physician practice acquisitions, all aimed at pushing insurer costs higher. AND, created some new health plans choices in “single payer” communities where Blue Cross is “all there is” for the individual and small group markets.

  4. Aside from rising medical prices and increased utilization of healthcare resources, health insurance premiums can rise because of an increase in the age and / or a decline in the health status of the insured population. They can also rise if there are new state imposed or federally mandated health benefits. Those who attribute higher healthcare and health insurance costs to insurance company profits or administrative complexity are way off target.

  5. “Margins have been in the 3-5% range for as long as national measurements have been kept.”
    Exactly right. Health insurance is an extremely competitive industry and always has been. Minimum medical cost ratios are totally unnecessary and place an added regulatory burden on top of an industry that already has plenty of oversight. Moreover, state regulators need to ensure that insurers remain solvent so that they can continue to pay claims on a timely basis.
    If health insurer A has an 81% medical cost ratio while health insurer B has a 78% MCR, which one offers lower premiums to the customer for a specific set of benefits? The answer is that you can’t tell from that information alone. It could well be that the insurer with the lower MCR and higher administrative costs is doing a much better job of managing care and minimizing fraud.
    I think the feds could contribute a lot more to bending the medical cost growth curve if they aggressively went after Medicare and Medicaid fraud, took medical dispute resolution out of the hands of juries in favor of health courts, and encouraged people, especially the elderly, to execute living wills and / or advance medical directives so doctors and family members know what care they want and don’t want when the end of life approaches. Minimum MCR’s are a huge waste of time and effort.

  6. CT IPA Doc, this has become the zombie lie that won’t die: insurers are to blame by sucking up higher profits while shafting providers.
    The reality is that provider income broadly has been going up at the same rate as health care expenditures generally. This is what the CMS data and any other data source will show, as long as you don’t cherry pick a one or two year period. Look at 1960 to 2010, or 1970 to 2010, or 1980 to 2010….you get the idea.
    Meanwhile, insurer profits are going up at the same rate as health care costs generally. They take up the same small share of the total pie today (give or take one percent) that they did decades ago. Margins have been in the 3-5% range for as long as national measurements have been kept.
    It’s true that in small markets there are generally a very small number of competitive insurers, and in a few markets it’s really only the local BCBS plan. But if you look at those markets, health care costs are NOT higher than in places with more competition. This is a bit of an embarrassment for the idea that markets will make things better, but it does not support the claim that insurers price gouge when there is one dominant player. Hasn’t Health Affairs already looked at this at some length?
    The case is different for hospital consolidation, where there is clear evidence that market dominance does lead to higher prices.
    Getting back to Roger Collier’s point: the low margins of insurers means that there is very little room for regulators to reduce premium increases without forcing some other change in the system. If an insurer can’t raise premiums by 20% for a product that is seeing 20% medical expenditure increases, something else will have to give.
    It will either go bankrupt, get out of that line of business, or find a way to pay providers and pharma less. The real “scandal” for health insurance in America has not been that it keeps paying providers less, but the opposite: it has failed to even hold the line on expenditures in keeping with GDP. That will have to change. CT IPA Doc, maybe one day you will really have something to complain about.

  7. Market competition is really working when a handful of health insurance companies have huge monopolies in virtually every state while working to disaggregate physicians and lower fees year after year, all the while getting state insurance departments to OK premium increases approaching 50%.