Responding to the Anthem Blue Cross rate hikes in California, President Obama will include a provision in the White House health care bill that would allow the federal government to review and deny excessive, unreasonable or discriminatory health insurance premium increases. Obama’s proposal is modeled on a rate review amendment offered by Sen. Dianne Feinstein (D-CA) during the Senate’s floor debate in December and revived as a stand-alone measure in recent weeks.
The final Senate health care bill already bars insurers with excessive rate hikes from participating in the insurance exchanges but this new provision would go a step further, federalizing the states’ traditional and somewhat uneven role in monitoring insurance rate increases. At least 25 states have some “form of a prior approve process for premium increases,” but state governments often lack the resources or political will to keep insurers in check. Obama’s provision is both politically and substantively significant. It protects consumers from unreasonable rate increases but also prohibits insurers from dramatically increasing rates during the elections of 2010 and 2012 or the period between the passage of comprehensive reform and implementation.
Democrats were worried that insurers would exploit the interim period to boost profits ahead of the new insurance regulations. The federal government’s new rate review powers could blunt at least some of the anticipated increases. Here is how rate review would work:
- Insurance companies would have to justify unreasonable premium increases.
- The Secretary could deny or modify health insurance rate increases that are found to be unjustified.
- The Secretary would determine whether states have the capability to conduct rate reviews.
- Establishes a Health Insurance Rate Authority to advise the Secretary. It will have seven members, including consumer representatives, an insurance industry representative, a physician and other experts like health economists and actuaries
Jonathan Cohn points out that “the key question, of course, is what constitutes ‘unreasonable‘” rate hike. According to the New York Times the Health Insurance Rate Authority, “made up of health industry experts that would issue an annual report setting the parameters for reasonable rate increases based on conditions in the market.” What’s ‘reasonable’ will vary from state to state.
In Arizona, rates were considered to be excessive if “they are likely to produce an underwriting profit that is unreasonably high.” “Considerations include loss experience, hazards, expenses, reasonable profit margins, trends, investment income from loss reserves, claims and earned premiums.” Oregon just passed a law giving consumers “30 days to comment on insurance company rate requests for individual, small group, and portability health insurance plans.” Insurers will be required to “separately report and justify increases and decreases of administrative expenses” and state regulators can consider an “insurance company’s overall finances, including profits, investment income, and surplus, when reviewing a proposed rate.”
It’s unclear if states with rate review have experienced smaller rate increases than states without such authority (state efforts are uneven and depend on how rate review authority is structured and enforced), but several states have successfully avoided sudden rate hikes. Regulators in North Dakota “were able to reduce 37 percent of the proposed rate increases filed by insurers,” for instance. “Maryland used their state laws to block a 46-percent premium increases” and New Hampshire regulators “were able to reduce a proposed 100 percent rate increase to 12.5 percent.”
Most rate regulation occurs in the individual health insurance market, where consumers are most vulnerable to sudden rate hikes. The presumption is that a large employer “should be sufficiently sophisticated and knowledgeable enough to negotiate rates with a carrier, and the state shouldn’t interfere with the process. These groups achieve bargaining power by leveraging their relatively large budget.” Here are efforts by Connecticut and Oregon regulators in the individual market in 2009 and 2010:
|Company||Pct. Requested||Pct. Approved|
|Anthem Health Plans (CT)||24%||17%|
|Health Net (CT)||19%||19%|
|Regence BC/BS (OR)||20%||16%|
|LifeWise Health Plan (OR)||16%||16%|
|PacificSource Health Plans (OR)||15%||15%|
Since conservatives will surely claim that rate review is some kind of government take over of private industry or a burdensome new federal requirement for insurers, it’s important to note that states that have instituted rate review house profitable insurance companies and maintain competitive and vibrant markets. Families USA has more on that here.